Auditing Problem by Empleo Solution Manual PDF

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Basic Concepts of Financial Statement AuditMultiple Choice B 2. D 3. D 4. B A 6. C 7. C 8. D B 10. C 11. A 12. D C 14. D 15. B 16. C Problem 1 Cielo CorporationAudit Adjusting Entries:Accounts receivable 15, Cash in bank 15,Doubtful accounts expense 15,Allowance for doubtful accounts 15,Purchases 50...

Description

Chapter 1 Basic Concepts of Financial Statement Audit Multiple Choice 1. B 5. A 9. B 13. C

2. D 6. C 10. C 14. D

3. D 7. C 11. A 15. B

4. B 8. D 12. D 16. C

Problem 1 Cielo Corporation Audit Adjusting Entries: Accounts receivable Cash in bank

15,000

Doubtful accounts expense Allowance for doubtful accounts

15,650

15,000

15,650

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 32,000/ 80% remaining life at 10/1/13 = 40,000 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

11,000

10,000

1

Chapter 1 Basic Concepts of Financial Statement Audit Interest expense 100,000 x 12% x 11/12

11,000

Retained earnings Goodwill

300,000 300,000 CIELO CORPORATION WORKING TRIAL BALANCE FOR THE YEAR ENDED SEPTEMBER 30, 2016 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

225,000 936,000

Adjustments Debit

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 47,600 2,159,300

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

36,500

50,000 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

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

9,100 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

2

348,550

2,575,400

104,565 243,985 2,575,400

Chapter 1 Basic Concepts of Financial Statement Audit Problem 2 Audit adjusting entries: Inventory, December 31, 2016 (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

145,200 145,200

Income Tax Expense Income Tax Payable

50,374

1,500

4,200

18,400

1,300

50,374

3

Chapter 1 Basic Concepts of Financial Statement Audit (Function of expense method) Flawless, Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016 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 Income tax expense ( 30% x 167,914) Profit Schedules:

P984,640 429,650 P554,990 52,700 P607,690 P130,916 154,620 145,200 P430,736 P176,954 9,040 P167,914 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, 2014 Net cost of purchases: Purchases Freight in Total goods available for sale Less: inventory, December 31, 2014 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

4

Chapter 1 Basic Concepts of Financial Statement Audit 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

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

Flawless, Inc. Statement of Comprehensive Income For the Year Ended December 31, 2016 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

5

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

Chapter 1 Basic Concepts of Financial Statement Audit 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

20,000

4. A. Advances to Officers and Employees Accounts Receivable

120,000 120,000

B. Sales Inventories Accounts Receivable Cost of good sold

20,000

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

6

Chapter 1 Basic Concepts of Financial Statement Audit A. Land Building Other income Land and Building Marketing and Administrative Expense

1,720,000 7,750,000 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 B. Marketing and Administrative Expense Accrued expense

126,000 126,000 50,800 50,800

11. Other Income Unearned Revenue

130,000

12. Interest Expense Interest Payable

200,000 200,000

130,000

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

7

180,000 7,800

127,126

Chapter 1 Basic Concepts of Financial Statement Audit Karkits Corporation Statement of Comprehensive Income For the year ended December 31, 2016

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, 2016 Assets CURRENT ASSETS Cash and Cash Equivalents Trading Securities, market value Accounts receivable, net Inventories Prepaid Insurance CURRENT ASSETS NON CURRENT ASSETS Property, Plant and Equipment Intangibles, Net NON CURRENT ASSETS Total assets

Notes 3 4

5 6

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

8

P

304,400 350,000 2,743,100 4,976,900 23,150 P 8,397,550

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

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

8

Chapter 1 Basic Concepts of Financial Statement Audit Retained Earnings SHAREHOLDERS’ EQUITY Total Liabilities and Shareholders’ Equity

5,021,191 11,371,191 19,936,250

NOTES 3. Cash Petty Cash Cash in bank Cash and Cash Equivalents

P 7,500 296,900 P 304,400

4. Trade and other receivables Accounts receivable, net Advance to Officers and Employees Allowance for uncollectible account Trade and Other Receivables

5. Property, plant and equipment Land Building Accumulated Depreciation - Building

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

P 1,720,000 P 7,750,000

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

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 1,885,80

9

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. Profit

10

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

c a b d d d d c b b b c a b c c d c a d b c a c d c c a b a

Chapter 2 Misstatements in the Financial Statements Problem 1 Under(Over) statement in Profit of

Retained

Nature of error

2017 Accounts Affected

Earnings 01/01/15

Omission of prepaid expenses 12/31/15 12/31/16 12/31/17 Omission of unearned revenue: 12/31/15 12/31/16 12/31/17 Omission of accrued expenses: 12/31/15 12/31/16 12/31/17 Omission of accrued revenues 12/31/15 12/31/16 12/31/17 Net under(over)statement Reported profit(loss) Corrected profit(loss)

2015

2016

29,000

(29,000) 30,000

(20,000)

(27,500)

42,500

24,000 240,000 264,000

20,000 (28,000)

27,500 (25,000)

(42,500) 45,000

( 2,000) (120,000) (122,000)

2017

(30,000) 34,000

28,000 (15,000)

25,000 (27,000)

(45,000) 41,000

11,000 200,000 211,000

Account

30,000

(28,000)

(25,000)

45,000

Dr.

Expenses Prepaid expenses Expenses

12/31/16 Assets U O U U U

Problem 3 1.

2. 3.

2016 Profit U O U U O

Expenses Expenses Accrued expenses

27,000

22,000

12/31/17 Assets U O U U U

Retained Earnings Wages Expense

160,000

Interest Income Retained Earnings

48,000

Insurance Expense Prepaid Insurance Retained Earnings

20,000 20,000

2017 Profit O U O NE O

160,000 48,000

40,000

11

34,000

15,000

Problem 2

1. 2. 3. 4. 5.

30,000 34,000

Revenue Revenue Unearned revenue

Revenues Accrued revenues Revenues

Cr.

28,000 15,000

25,000 27,000

45,000 41,000 41,000

Chapter 2 Correction of Errors 4.

5.

6.

7.

8.

Supplies Expense Retained Earnings

25,000

Unused Supplies Supplies Expense

28,000

25,000

28,000

Retained Earnings Accumulated Amortization – Development Cost Capitalized Development Cost Amortization Expense – Development Cost

80,000 80,000

Retained Earnings Service Revenue Unearned Service Revenue

80,000

120,000 40,000 40,000 40,000

Retained Earnings Rent Revenue

36,000 36,000

Office Equipment Depreciation Expense - Equipment Accumulated Depreciation Retained Earnings

1,500,000 300,000 900,000 900,000

Problem 4 (Function of Expense Method) 1. Cost of Goods Sold Retained Earnings 2.

Cost of Goods Sold Inventory

3.

Retained Earnings Cost of Goods Sold

4.

No entry ( no effect on cost of sales and profit of both 2016 and 2017; as both beginning inventory and purchases in 2017 had been transferred to cost of sales)

5.

Cost of Goods Sold Retained Earnings

6.

Sales Retained Earnings

12

Chapter 2 Correction of Errors Problem 5 (Dragon Ball Company) (1) Schedule to compute correct profit: Under(over)statement in Profit 2015 2016 Omission of accrued wages 12/31/15 12/31/16 12/31/17 Omission of unused supplies 12/31/15 12/31/16 12/31/17 Omission of accrued interest income 12/31/15 Sale of equipment - Proceeds Gain on sale Recorded depreciation Omission of unearned rent Net under(over)statement Reported Profit Corrected Profit

(80,000)

80,000 (60,000)

32,000

(32,000) 25,000

18,000 (25,000) 7,000 4,200

(18,000)

(43,800) 450,000 406,200

(800) 290,000 289,200

4,200

(2) Audit adjusting entries: Retained Earnings Wages Expense

60,000

Wages Expense Wages Payable

78,000

Supplies Expense Retained Earnings

25,000

Unused Supplies Supplies Expense

22,400

60,000 78,000

25,000 22,400

Retained Earnings Accumulated Depreciation Equipment Depreciation Expense

9,600 36,600 42,000 4,200

(3) Correcting entries in 2018 Retained Earnings Wages Expense

78,000 78,000

Supplies Expense Retained Earnings

22,400

Retained Earnings Accumulated Depreciation Equipment

5,400 36,600

22,400

42,000

13

2017

RE, 1/1/15

60,000 (78,000)

(60,000)

(25,000) 22,400

25,000

4,200 (40,000) (56,400) 440,000 383,600

(9,600) (44,600)

Chapter 2 Correction of Errors Problem 6 (Erasure Company) 1.

2.

3. 4.

Accumulated Depreciation Depreciation Expense Retained Earnings