Chapter19 - Answer PDF

CHAPTER
COMPREHENSIVE AUDIT OF
19 BALANCE SHEET AND INCOME
STATEMENT ACCOUNTS
19-1. Daffodil, Inc.
Adjusting Journal Entries

12.31.07
AJE (1) Share donation 60,000

Treasury shares 35,000
Land 10,000
Building 15,000
(2) Accumulated depreciation - machinery 1,000

Loss on sale of machinery 2,000
Machinery 3,000
Cost P 5,000
Less: AD (20%) 1,000
NBV P 4,000
Proceeds 2,000
Loss P 2,000
(3) (a) Accumulated depreciation - building 300

Retained earnings 300
(b) Factory operating expenses 21,300

Accumulated depreciation - building 6,300
Accumulated depreciation - machinery 15,000
Building (P315,000 x 2%)

Machinery:
5,000 x 10% = P 500
145,000 x 10% = 14,500
P15,000
(4) Merchandise inventory, 12.31.07 B/S 175,000

Merchandise inventory, 12.31.07 I/S 175,000
19-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
(5) Administrative expenses 1,000

Allowance for doubtful accounts 1,000
(6) Factory operating expenses 3,000

Unexpired insurance 3,000
(7) Retained earnings 2,500

Bond interest expense 2,500
Unamortized bond discount 5,000
(8) Sinking fund assets 23,500

First Mortgage SF Bonds 23,500
(9) Sinking fund assets 1,500

Sinking fund income 1,500
Comprehensive Audit of Balance Sheet and Income Statement Accounts 19-3
19-1. Daffodil, Inc. (continued)
Daffodil, Inc.
Working Trial Balance
12.31.07
Trial Balance Adjustments Income Statement Balance Sheet
Dr Cr Dr Cr Dr Cr Dr Cr
Cash P 64,000 P 64,000
Accounts receivable 200,000 200,000
Provision for doubtful accounts P 1,000 (5) 1,000 P 2,000
Inventories, 12.31.06 223,000 P 223,000
Unexpired insurance, 12.31.06 6,000 (6) 3,000 3,000
Land 220,000 (1) 10,000 210,000
Buildings 330,000 (1) 15,000 315,000
Accumulated Depreciation - Buildings 6,600 (3a) 300 (3b) 6,300 12,600
Machinery 148,000 (2) 3,000 145,000
Accumulated Depreciation - Machinery 15,000 (2) 1,000 (3b) 15,000 29,000
Sinking fund assets 25,000 (8) 23,500
(9) 1,500 50,000
Unamortized bond discount 25,000 (7) 5,000 20,000
Treasury shares, ordinary 35,000 (1) 35,000 -
Accounts payable 88,000 88,000
Bond interest accrued 3,750 3,750
1st Mortgage, 6% SF Bonds 226,500 (8) 23,500 250,000
Ordinary shares 500,000 500,000
Premium on ordinary shares 50,000 50,000
Share donation 60,000 (1) 60,000 -
Retained earnings, 12.31.06 74,150 (7) 2,500 (3a) 300 71,950
Sales 875,000 P 875,000
Purchases 283,500 283,500
Payroll 169,000 169,000
Factory operating expenses 121,500 (3b) 21,300
(6) 3,000 145,800
Administrative expenses 35,000 (5) 1,000 36,000
Bond interest expense 15,000 (7) 2,500 17,500

P1,900,000 P1,900,000
Loss on sale of machinery (2) 2,000 2,000
Merchandise inventory 12.31.07 (4) 175,000 (4) 175,000 175,000 175,000
Sinking fund income (9) 1,500 1,500
P 293,600 P 293,600 P 876,800 P1,051,500 P1,182,000 P1,007,300
Net Income 174,700 174,700
P1,051,500 P1,051,500 P1,182,000 P1,182,000
19-2.
Part I Adjusting Journal Entries, 12-31-05
AJE (1) Depreciation expense 1,778

Accumulated depreciation 1,778
[(P22,000 P2,000) P4,000]

9
(2) Prepaid interest 5,000

Retained earnings 3,100
Interest expense 1,900
(3) Merchandise inventory, 12-31-07, BS 15,000

Merchandise inventory, 12-31-07, IS or 15,000
Cost of Sales
(4) Retained Earnings 6,000

Purchases 6,000
(5) Prepaid insurance 3,000
Insurance expense 3,000
(6) Store supplies inventory 1,450
Store supplies expense 550
Retained earnings 900
(7) Retained earnings 730
Commissions expense 240
Accrued commissions payable 970
(8) Cash in bank 650
Miscellaneous income 650
(9) Purchases 800
Accounts payable 800
(10) Income from Investment 3,000
Investment 3,000
(11) Prepaid advertising and promotions 90,000
Advertising and promotions expense 90,000
(12) NO AJE
(13) Machinery 20,000

Depreciation expense machinery 167
Allowance for depreciation machinery 167
Repairs and maintenance 20,000
(14) Miscellaneous income 2,000
Gain on sale of treasury shares 5,000
Land 2,000
Additional paid-in capital arising from
Treasury Share transactions 5,000
(15) Doubtful accounts expense 14,500
Allowance for uncollectible accounts 14,500
Required allowance as of 12-31-07

on past due accounts (5% x P30,000) P 1,500
on current accounts (1% x P400,000) 4,000
Total P 5,500
Unadjusted debit balance of the Allowance
account 9,000
Additional Provision P14,500
Part II Column B Adjustment, 12-31-07
AJE (a) Retained earnings xx

Purchases xx
(b) NONE xx
xx
(c) Retained Earnings xx
Allowance for depreciation xx
(d) Retained Earnings xx

(e) Machinery xx
Retained earnings xx
(f) Depreciation xx
(g) Retained earnings xx

Taxes xx
19-3. International Company
AJE (1) Depreciation expense 3,200

Accumulated depreciation delivery vehicle 3,200
(2) Cost of sales 19,000


Inventory 8,500
(4) Cash 5,600

Accounts receivable 5,600
(5) Accumulated depreciation equipment 22,000

Equipment 18,300
Gain on sale of equipment 3,700
(6) Estimated litigation loss 125,000

Estimated litigation liability 125,000
(7) Unrealized holding gain or loss Income 2,000

Allowance for decline in value of securities 2,000
(8) Accrued salaries payable 3,800

Salaries expense 3,800
(9) Depreciation expense 4,000

Equipment 32,000
Repairs expense 32,000
Accumulated depreciation equipment 4,000
(10) Insurance expense 5,000

Prepaid insurance 7,000
(11) No adjusting entry. Trademark has indefinite

life and no amortization need be made.
19-4. Sunshine Cosmetics, Inc.
Requirement (1)
AJE (1) Inventory, Dec. 31, 2006 (BS) 67,200

Inventory, Dec. 31, 2006 (IS) or
Cost of sales 67,200
(2) Doubtful accounts expense 14,920

Allowance for doubtful accounts
(15,660 740) 14,920
(3) Accounts payable 20,760

Purchase returns and allowances 20,760
(4) Sales commissions 216
Accrued commissions payable 216
(5) Freight-in 1,600

Accounts payable 1,600
(6) Advertising expense 1,212

Prepaid advertising 1,212
(7) Freight-out or Expense 8,400

Sales 8,400
(8) Interest receivable 1,380

Interest income 1,380
(9) Depreciation expense 1,300

(10) Supplies expense 1,160
Unused Supplies 1,160
(11) Provision for Income tax expense 107,386
Income tax payable 107,386
Requirement (2)
Sunshine Cosmetics, Inc.
Income Statement
For the Year Ended December 31, 2006
Revenue from sales:

Sales P998,800 (a)
Less: Sales returns and
and allowances P 22,400
Sales discounts 1,760 24,160 P974,640
Cost of goods sold:
Inventory, January 1 P179,400
Net purchases:
Purchases P346,000
Less purchase returns
and allowances 20,760 (c) 325,240
Freight-in 12,650 (b)
Cost of goods available
for sale P517,290
Less Inventory, December 31 108,300 (d) 408,990
Gross profit on sales P565,650
Other income:
Interest revenue P 2,780 (i)
Dividend revenue 14,300
Gain on sale of assets 37,000 54,080
Total income P619,730
Operating expenses:
Selling expenses:
Sales salaries and
commissions P 70,216 (e)
Advertising expense 33,392 (f)
Depreciation expense
Sales/delivery equipment 13,500 (g)
Freight expense 8,400
Travel expense sales
representatives 9,120
Miscellaneous selling
expenses 4,400 P139,028
General and administrative
expenses:
Legal services P 4,450
Insurance and licenses 17,000
Depreciation expense
office equipment 9,600
Utilities 12,800
Telephone and postage 2,950
Supplies expense 1,160 (k)
Officers salaries 73,200
Doubtful accounts expense 14,920 (h) 136,080
Total operating expenses (275,108)
Other expense and losses:
Interest expense P 9,040
Loss on sale of equipment 45,200 (54,240)
Income from continuing
operations before income taxes P290,382
Income taxes 92,922 (j)
Income from continuing
operations P197,460
Discontinued operations:
Gain from discontinued
operations (net of income
taxes of P25,600) 54,400
Net income P251,860
Earnings per ordinary share:
Income from continuing operations (P197,460 78,000 shares) P2.53
Gain from discontinued operations (P54,400 78,000 shares) 0.70
Net income (P251,860 78,000 shares) P3.23
Computations:
(a) Sales: P990,400 + P8,400 = P998,800

(b) Freight-in: P11,050 + P1,600 = P12,650
(c) Purchase returns and allowances: P346,000 x 6% = P20,760
(d) Inventory: P41,100 + P67,200 = P108,300
(e) Sales salaries and commissions: P70,000 + (P7,200 x 3%) = P70,216
(f) Advertising expense: P32,180 + (P3,636 x 2/6) = P33,392
(g) Depreciation expense: P12,200 + (P15,600 x 10/120) = P13,500
(h) Doubtful accounts expense: (P522,000 x 3%) P740 = P14,920
(i) Interest revenue: P1,400 + P1,380 = P2,780
(j) Income taxes: P335,582 x 32% = P107,387
(k) Supplies expense: P4,360 P3,200 = P1,160
Sunshine Cosmetics, Inc.

Retained Earnings Statement
Retained earnings, January 1 P 881,340

Add net income per income statement 251,860
P1,133,200
Deduct dividends paid 66,000
Retained earnings, December 31 P1,067,200
19-5. Del Bakery
Working papers are not required, but they facilitate the preparation of a corrected
balance sheet.
Del Bakery
Working Papers for Corrected Balance Sheet
December 31, 2007
Balance Sheet Corrections Corrected Balance

Sheet
Account Title Debit Credit Debit Credit Debit Credit
Current Assets ..................... 53,415 .............. ............. (a) 53,415 .............. ..............
Current Liabilities ................. .............. 29,000 (c) 29,000 ............. .............. ..............
Other Assets ........................ 75,120 .............. ............. (b) 75,120 .............. ..............
Other Liabilities .................... .............. 3,600 (d) 3,600 ............. .............. ..............
Investment in Business ........ .............. 95,935 (e) 95,935 ............. .............. ..............
128,535 128,535 ............. ............. .............. ..............
Cash..................................... .............. .............. (a) 10,600 ............. 10,600 ..............

Investment Securities
trading (at market value).... .............. .............. (a) 2,575 ............. 2,575 ..............
Trade Accounts Receivable. .............. .............. (a) 12,500 ............. 12,500 ..............
Inventory............................... .............. .............. (a) 8,040 ............. 8,040 ..............
Supplies Inventory................ .............. .............. (a) 425 ............. 425 ..............
Delivery Truck ...................... .............. .............. (a) 2,100 ............. 2,100 ..............
Fixtures................................. .............. .............. (a) 12,500 ............. 12,500 ..............
Accumulated Depreciation
Fixtures............................... .............. .............. ............. (a) 2,100 .............. 2,100
Cash Surrender Value of
Insurance on Officers
Lives................................... .............. .............. (a) 4,100 ............. 4,100 ..............
Retained Earnings................ .............. .............. (a) 2,675 ............. .............. ..............
.............. .............. (b) 7,750 ............. .............. ..............
.............. .............. (d) 350 ............. .............. 30,160
.............. .............. ............. (e) 40,935 .............. ..............
Land ..................................... .............. .............. (b) 30,000 ............. 30,000 ..............
Buildings............................... .............. .............. (b) 62,000 ............. 62,000 ..............
Accumulated Depreciation
Buildings [2 (P62,000 20)]
.............. .............. ............. (b) 7,750 .............. 7,750
11% Mortgage Payable........ .............. .............. ............. (b) 12,000 .............. 12,000
11% Mortgage Payable (current
portion) ............................... .............. .............. ............. (b) 4,000 .............. 4,000
Interest Payable ................... .............. .............. ............. (b) 880 .............. 880
Trade Accounts Payable...... .............. .............. ............. (c) 29,000 .............. 29,000
Miscellaneous Liabilities ...... .............. .............. ............. (d) 3,950 .............. 3,950
Share Capital, P5 stated value,
5,000 shares ...................... .............. .............. ............. (e) 25,000 .............. 25,000
Paid-in Capital from Sale of
Shares at More Than Stated
Value .................................. .............. .............. ............. (e) 30,000 .............. 30,000
284,150 284,150 144,840 144,840
Corrections: (a) To restate current assets (d) To restate other liabilities

(b) To restate other assets (e) To restate owners equity accounts
(c) To restate current liabilities
Del Bakery
Corrected Balance Sheet
December 31, 2007
Assets
Current assets:
Cash ........................................................................ P10,600
Investment securities trading (reported at
market; cost P4,250) ......................................... 2,575
Trade accounts receivable (fully collectible).......... 12,500
Inventory................................................................. 8,040
Supplies inventory .................................................. 425 P 34,140
Investments:
Cash surrender value of life insurance.................... 4,100
Land, buildings and equipment:
Land........................................................................ P30,000
Buildings.................................................. P62,000
Less accumulated depreciation .......... 7,750 54,250
Fixtures .................................................... P12,500
Less accumulated depreciation .......... 2,100 10,400
Delivery truck ......................................................... 2,100 96,750
Total assets ................................................................... P134,990
Liabilities
Current liabilities:
Mortgage payable, portion due this year ................ P 4,000
Accounts payable.................................................... 29,000
Interest payable....................................................... 880
Miscellaneous accrued liabilities ............................ 3,950 P 37,830
11% Mortgage payable (noncurrent portion) ............... 12,000
Total liabilities.............................................................. P 49,830
Owners Equity
Contributed capital:
Share capital, P5 stated value,
5,000 shares ....................................... P25,000
Paid-in capital from sale of
ordinary shares at more than
stated value ........................................ 30,000 P55,000
Retained earnings ......................................................... 30,160
Total owners equity..................................................... 85,160
Total liabilities and owners equity .............................. P134,990
19-6. Masipag Corporation
Adjusting Journal Entries, Dec. 31, 2007
AJE (1) Cash 200,000

(2) Accounts receivable 10,000

Cash 10,000
(3) Bank loan payable 400,000

Other expenses 12,500
Cash 412,500
(4) Cash 75,000

(5) Operating expenses 1,500

Cash 1,500
(6) Cash 16,000

Other income 16,000
(7) Accounts receivable others (2,000 + 3,000) 5,000

Operating expenses 2,000
Cash 7,000
(8) Marketable securities 40,000

Other income 40,000
(9) Other income 54,000

Marketable securities 54,000
(10) Marketable securities 32,000

Other income 32,000
(10.a) Valuation allowance Marketable securities

Trading 145,600
Other income Unrealized holding gain 145,600
(11) Sales 500,000

(12) Inventory 400,000

(13) Accounts receivable others (30,000 15,000) 15,000

(14) Accounts receivable others 55,000


Other current liabilities 50,000

Allowance for doubtful accounts 21,900
(17) Other income 54,545

Discount on notes receivable 54,545
(18) Discount on notes receivable 4,545

Other income 4,545



Inventory 16,000
(23) Sales 13,000


Prepaid expenses 46,250

(26) Other assets 60,000

Operating expense 120,000
(27) Long-term bond investment 5,777

Other income 5,777

Other income 5,333
(29) Land 1,062,500

Building 3,187,500
Land and building 4,250,000
(30) Building 425,000

Land and building 425,000


(33) Land and building 237,500

Accumulated depreciation building 121,922
(34) Prepaid expenses 10,000

Equipment 20,000

Accumulated depreciation equipment 55,400
(36) Accounts payable 50,000


Estimated liability on warranties 15,000
(38) Other current liabilities 50,000

Other expenses 50,000
(39) Income taxes payable 115,290

Provision for income tax 115,290
MASIPAG CORPORATION
Balance Sheet
December 31, 2007
Assets
Current assets
Cash P 734,000
Marketable securities P 400,000
Valuation allowance 145,600 545,600
Accounts receivable P 442,000
Allowance for doubtful accounts (33,150) 408,850
Notes receivable P 600,000
Discount on notes receivable (50,000) 550,000
Accounts receivable others 96,333
Inventory, December 31, 2007 1,960,500
Total current assets P4,470,533
Investments
Long-term bond investment 744,077
Property, plant and equipment
Land P1,062,500
Building P3,612,500
Accumulated depreciation Building (121,922) 3,490,578
Equipment P1,654,000
Accumulated depreciation Equipment (235,400) 1,418,600
Total property, plant and equipment 5,971,678
Other assets 110,000
Total assets P11,296,288
Liabilities and Shareholders Equity
Current liabilities
Accounts payable P 877,000
Bank loan payable 1,100,000
Accrued expenses payable 59,000
Income taxes payable 130,558
Estimated liability on warranties 70,000
Total current liabilities P 2,336,558
Shareholders equity
Ordinary shares P5,000,000
Additional paid-in capital 1,655,250
Retained Earnings 2,304,480
Total shareholders equity 8,959,730
Total liabilities and shareholders equity P11,296,288
MASIPAG CORPORATION
Income Statement
Sales P 6,437,000
Cost of sales (4,060,000)
Gross profit P 2,377,000
Other income 225,710
Operating expenses (1,511,509)
Other expenses (37,500)
Income before taxes P 1,053,701
Provision for income tax (342,441)
Net Income P 711,260
19-7. Felicity Company
Adjusting Journal Entries, Dec. 31, 2007
AJE (1) Cash 31,000

Prepaid interest 3,000
Other charges 2,000
Long-term debt (current portion) 24,000
Long-term debt 12,000
(2) Cash 2,000

Accounts payable and others 2,000
(3) Investments in SMC shares available for sale

(non-current) 72,000
Marketable securities 72,000
(4) Unrealized loss due to decline in value of

non-current investment (equity) 20,000
(5) Allowance for doubtful accounts 41,100



(8) Sales 14,400

(9) Revaluation increment 120,000

Property and equipment 200,000
(10) Accumulated depreciation 36,000


(12) Revaluation increment 24,000

(13) Property and equipment 30,000

(14) Retained earnings 13,000

Cumulative effect of change in accounting 13,000
principle

Cash 22,000
(16) Provision for income tax 25,445
Income tax payable 25,445
FELICITY COMPANY
Balance Sheet
December 31, 2007
Assets
Current Assets:
Cash............................................................................................ P 123,600
Accounts receivable ................................................................... 1,751,820
Allowance for doubtful accounts ............................................... (27,000)
Accounts receivable -others ....................................................... 62,000
Inventories.................................................................................. 262,000
Prepaid interest........................................................................... 3,000
Non-current Assets:
Advances to affiliate .................................................................. 48,000
Investments in SMC shares available for sale......................... 72,000
Allowance for decline in value of non-current investment ........ (20,000)
Property and equipment ............................................................. 2,600,000
Accumulated depreciation.......................................................... (1,172,000)
Total Assets P 3,703,420
Liabilities and Shareholders Equity
Accounts payable and others (including current portion of

bank loan of P24,000) ............................................................... P 434,616
Income tax payable............................................................................ 100,205
Long-term debt.................................................................................. 72,000
Ordinary share capital ....................................................................... 2,042,000
Retained earnings .............................................................................. 978,599
Unrealized loss due to decline in value of investment in SMC ......... (20,000)
Revaluation increment....................................................................... 96,000
Total Liabilities and Shareholders Equity P 3,703,420
FELICITY COMPANY
Income Statement
Sales .................................................................................................. P 2,757,124

Cost of sales ...................................................................................... 2,257,604
Gross profit........................................................................................ P 499,520
Operating expenses ........................................................................... (83,522)
Other charges..................................................................................... (102,000)
Income from continuing operations before tax.................................. P 313,998

Provision for income tax (35%) ........................................................ 109,899
Income from continuing operations after tax .................................... P 204,099
Discontinued operations (net) ........................................................... (6,500)
Net income ........................................................................................ P 197,599
19-8. Learn Company
Condensed Comparative Income Statements
2009 2008 2007

Construction revenue P900,000 P420,000 P200,000
Construction expense (420,000) (182,000) (80,000)
Other expenses (80,000) (70,000) (50,000)
Income before income taxes P400,000 P168,000 P 70,000
Income tax expense (120,000) (50,400) (21,000)
Net income P280,000 P117,600 P 49,000
Comparative Statements of Retained Earnings
2009 2008 2007

Balance at beginning of year,
as previously reported P 77,000 P 7,000 P 0
Add: Adjustment for the
cumulative effect on prior years
of applying retroactively the
new method of accounting for
long-term contracts (net of
b a
income taxes) 89,600 42,000 0
as adjusted P166,600 P 49,000 P 0
Net income 280,000 117,600 49,000
Balance at end of year P446,600 P166,600 P 49,000
Note: The company has accounted for revenue and costs for long-term
construction contracts by the percentage-of-completion method in 2009, whereas
in prior years revenues and costs were determined by the completed-contract
method. 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. The effect
of the accounting change on income of 2009 and on income as previously reported
in 2007 and 2008 is as follows:
Increase
2009 2008 2007
c
Net income P112,000 P47,600 P42,000
Earnings per ordinary share P11.20 P4.76 P4.20
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.
a
P49,000 P7,000
b
(P49,000 + P117,600) (P7,000 + P70,000)
c
P280,000 [(P600,000 P280,000 P80,000) x (1 0.30)]
19-9. Goody Construction Company
Requirement (1)
2007
Jan. 1 Construction in Progress 70,000 a
Retained Earnings [P70,000 x (1 0.30)] 49,000
Deferred Tax Asset 21,000
a
[(P100,000 + P120,000) + (P125,000 +
P75,000)] (P100,000 + P250,000)
Requirement (2)
GOODY CONSTRUCTION COMPANY

Condensed Comparative Income Statements (Partial)
2007 2006 2005

Income before income taxes P400,000 P200,000 P220,000
Income taxes at 30% (120,000) (60,000) (66,000)
Net income P280,000 P140,000 P154,000
Earnings per ordinary share

(100,000 shares) P2.80 P1.40 P1.54
Comparative Statements of Retained Earnings
2007 2006 2005

c b
as previously reported P245,000 P 70,000 P 0
Add: Adjustment for the
cumulative effect on prior years
of applying retroactively
applying the new method of
accounting for long-term
e d
contracts (net of income taxes) 49,000 84,000 0
as adjusted P294,000 P154,000 P 0
Net income 280,000 140,000 154,000
Balance at end of year P574,000 P294,000 P154,000
b
P100,000 x (1 0.30)
c
P250,000 x (1 0.30) + P70,000
d
[(P100,000 + P120,000) P100,000] x (1 0.30)
e
[(P100,000 + P120,000 + P125,000 + P75,000) (P100,000 + P250,000)]
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, whereas
in prior years revenues and costs were determined by the competed-contract
method. 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. The effect
of the accounting change on income of 2007 and on income as previously reported
in 2005 and 2006 is as follows:
Increase
2007 2006 2005
h g f
Net income P(49,000) P(35,000) P84,000
Earnings per ordinary share P(0.49) P(0.35) P0.84
The balances of retained earnings and deferred taxes for 2006 and 2007 have been
adjusted for the after-tax effect of applying the new method of accounting
retroactively:
f
(P220,000 P100,000) x (1 0.30)
g
(P200,000 P250,000) x (1 0.30)
h
[P400,000 (P820,000 P350,000)] x (1 0.30)
Items Restated:
On the 2005 and 2006 income statements, construction revenues and expenses
would be restated to the appropriate amounts for the percentage of completion
method. The construction in progress, deferred income taxes, and retained
earnings on the balance sheets would also be restated.
19-10. Sand Company
Requirement (1)
a. Incorrect entries:
Building 60,000
Notes Payable 60,000
Depreciation Expense: Building
(P60,000 30) 2,000
Accumulated Depreciation: Building 2,000
Correct entries:
a
Building 40,981
Discount on Notes Payable 19,019
Notes Payable 60,000
a
P60,000 x 0.683013
b
Depreciation Expense: Building 1,366
c
Interest Expense 4,098
Accumulated Depreciation 1,366
b
P40,981 30
c
Interest computed using effective
interest method: 10% x P40,981
Entries to correct error:

Building 19,019
Accumulated Depreciation: Building 634
Interest Expense 4,098
Depreciation Expense: Building 634
b. Retained Earnings 40,000

Cost of Goods Sold 40,000
To correct error from prior year.
Cost of Goods Sold 15,000

Inventory 15,000
To correct error in current year.
c. The error from 2005 was counterbalanced at

the end of 2006, so it can be ignored.
Salaries and Wages Expense 18,000
To correct error in salary and wage
accrual in 2006.
Salaries and Wages Expense 10,000
Salaries and Wages Payable 10,000
To accrue salaries and wages at
December 31, 2007.
Requirement (2)
a. See Requirement 1.a. of this solution for the incorrect entries that were made
and the correct entries that should have been made.
Discount on Notes Payable (total discount

of P19,019 less amount of P4,098
amortized for 2007) 14,921
Accumulated Depreciation: Building 634
d
Retained Earnings 3,464
Building 19,019
d
Correction of interest expense
understatement of P4,098 less
depreciation overstatement of P634
b. The error from 2006 was counterbalanced

by the end of 2005, so it can be ignored.

Inventory 15,000
c. The errors from 2005 and 2006 were counterbalanced by the end of 2006 and
2007; respectively, so they can be ignored.

Salaries and Wages Payable 10,000
19-11. Play Company
Requirement (1)
SFAS No. 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. Any resulting adjustment
should be reported as an adjustment to the opening balance of retained earnings.
Comparative information should be restated unless it is impracticable to do so.
The financial statements, including the comparative information for prior periods,
are presented as if the new accounting policy had always been in use. Therefore,
comparative information is restated in order to reflect the new accounting policy.
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. Any other information with respect to prior periods,
such as historical summaries of financial data, is also restated.
PLAY COMPANY
Worksheet to Correct Income Before Income Taxes
Year Ended December 31

2007 2006
Income before income taxes, before adjustments P4,030,000 P3,330,000
Adjustments:
Depreciate certain equipment over 8-year life
instead of 10-year life (Schedule 1) (25,000) --
Correct 2006 error 180,000 (180,000)
Record 2007 provision for doubtful accounts
(P58,500,000 x 0.2%) (117,000) --
Increase estimated warranty liability (170,000) --
Effect of change in accounting principle from
expensing to capitalizing relining costs in the
year of the change (Schedule 2)
Furnace A (Jan. 2006) (56,000) 224,000
Furnace B (Jan. 2007) 240,000 --
Net adjustments 52,000 44,000
Income before income taxes P4,082,000 P3,374,000
Schedule 1:
Computation of Adjusted Depreciation
Cost of equipment (no salvage value) P1,000,000

Depreciation based on 10-year life P 100,000
Depreciation based on 8-year life (125,000)
Adjustment P (25,000)
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 P300,000

Depreciation on Furnace B based on 5-year life
(P300,000 x 20%) (60,000)
Depreciation on Furnace A based on 5-year life
(P280,000 x 20%) (56,000)
Adjustment P184,000
Requirement (2)
PLAY COMPANY
Effect Before Income Taxes
of Change in Accounting Principle From
Expensing to Capitalizing Relining Costs
For Year Ended December 31, 2007
Capitalization of Furnace A P280,000

Depreciation on Furnace A based on 5-year life
(P280,000 x 20%) (56,000)
Adjustment P224,000
19-12. Jo Francisco, Inc.
Net Income for 2005 Retained Earnings 12/31/06

Item Understated Overstated Understated Overstated
1. P14,100 0 0 0
2. P 7,000 0 P 5,000 0
3. 0 P22,000 0 P11,000
4. P33,000 0 P33,000 0
5. 0 P20,000 0 P10,000
6. P18,200 0 0 0
Although explanations were not required in answering the question, they are
included below for your interest.
Explanations:
1. The net income would be understated in 2005 because interest income is
understated. The net income would be overstated in 2006 because interest
income is overstated. The errors, however, would counterbalance (wash) so
that the Balance Sheet (Retained Earnings) would be correct at the end of
2006.
2. The depreciation expense in 2005 should be P1,000 for this machine. Since
the machine was bought on July 1, 2005, only one-half of a year should be
taken in 2005 (P8,000/4 X 1/2 = P1,000). The company expensed P8,000
instead of P1,000 so net income is understated by P7,000 in 2006. An
additional P2,000 of depreciation expense should have been taken in 2006. At
the end of 2006, retained earnings would be understated by P5,000 (P7,000
P2,000).
3. PAS 38, paragraphs 54 to 57 govern the accounting for research and
development costs. Net income in 2005 is overstated P22,000 (P33,000
research and development costs capitalized less P11,000 amortized). By the
end of 2006, only P11,000 of the research and development costs would
remain as an asset. Therefore, retained earnings would be overstated by
P11,000 (P33,000 research and development costs P22,000 amortized).
4. The security deposit should be a long-term asset, called refundable deposits.
The P8,000 of last months rent is also an asset, called prepaid rent. The net
income of 2005 is understated by P33,000 (P25,000 + P8,000) because these
amounts were expensed. Retained earnings will continue to be understated by
P33,000 until the last year of the lease. The security deposit will then be
refunded, and the last months rent should be expensed.
5. P10,000 or one-third of P30,000 should be reported as income each year. In
2005, P30,000 was reported as income when only P10,000 should have been
reported. Because P20,000 too much was reported, the net income of 2005 is
overstated. At the end of 2006, P20,000 should have been reported as income,
so retained earnings is still overstated by P10,000 (P30,000 P20,000).
6. The ending inventory would be understated since the merchandise was
omitted. Because ending inventory and net income have a direct relationship,
net income in 2005 would be understated. The ending inventory of 2005
becomes the beginning inventory of 2006. If beginning inventory of 2006 is
understated, then net income of 2006 is overstated (inverse relationship). The
omission in inventory over the two-year period will counterbalance, and
retained earnings at the end of 2006 will be correct.
19-13. JC Patrick Corporation
2006 2007
Net income, as reported P29,000 P37,000
Rent received in 2006, earned in 2007 (1,300) 1,300
Wages not accrued, 12/31/05 1,100
Wages not accrued, 12/31/06 (1,500) 1,500
Wages not accrued, 12/31/07 (940)
Inventory of supplies, 12/31/05 (1,300)
Inventory of supplies, 12/31/06 740 (740)
Inventory of supplies, 12/31/07 1,420
Corrected net income P26,740 P39,540

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CHAPTER

19-1. Daffodil, Inc.

Adjusting Journal Entries

AJE (1) Share donation 60,000

(2) Accumulated depreciation - machinery 1,000

(3) (a) Accumulated depreciation - building 300

(b) Factory operating expenses 21,300

Building (P315,000 x 2%)

(4) Merchandise inventory, 12.31.07 B/S 175,000

(5) Administrative expenses 1,000

(6) Factory operating expenses 3,000

(7) Retained earnings 2,500

(8) Sinking fund assets 23,500

(9) Sinking fund assets 1,500

Bond interest expense 15,000 (7) 2,500 17,500

AJE (1) Depreciation expense 1,778

[(P22,000 P2,000) P4,000]

(2) Prepaid interest 5,000

(3) Merchandise inventory, 12-31-07, BS 15,000

(4) Retained Earnings 6,000

(13) Machinery 20,000

Required allowance as of 12-31-07

Part II Column B Adjustment, 12-31-07

AJE (a) Retained earnings xx

(d) Retained Earnings xx

(g) Retained earnings xx

19-3. International Company

AJE (1) Depreciation expense 3,200

(2) Cost of sales 19,000

(3) Cost of sales 8,500

(4) Cash 5,600

(5) Accumulated depreciation equipment 22,000

(6) Estimated litigation loss 125,000

(7) Unrealized holding gain or loss Income 2,000

(8) Accrued salaries payable 3,800

(9) Depreciation expense 4,000

(10) Insurance expense 5,000

(11) No adjusting entry. Trademark has indefinite

19-4. Sunshine Cosmetics, Inc.

AJE (1) Inventory, Dec. 31, 2006 (BS) 67,200

(2) Doubtful accounts expense 14,920

(3) Accounts payable 20,760

(5) Freight-in 1,600

(6) Advertising expense 1,212

(7) Freight-out or Expense 8,400

(8) Interest receivable 1,380

(9) Depreciation expense 1,300

Revenue from sales:

(a) Sales: P990,400 + P8,400 = P998,800

Sunshine Cosmetics, Inc.

Retained earnings, January 1 P 881,340

19-5. Del Bakery

Balance Sheet Corrections Corrected Balance

Cash..................................... .............. .............. (a) 10,600 ............. 10,600 ..............

Corrections: (a) To restate current assets (d) To restate other liabilities

19-6. Masipag Corporation

Adjusting Journal Entries, Dec. 31, 2007

AJE (1) Cash 200,000

(2) Accounts receivable 10,000

(3) Bank loan payable 400,000

(4) Cash 75,000

(5) Operating expenses 1,500

(6) Cash 16,000