Chapter18 - Answer PDF

CHAPTER
PREPARATION OF AUDITED
18 FINANCIAL STATEMENTS
18-1. Salve Company
Requirement (1)
Salve Company
For the Year Ended December 31, 2006
Schedule 1: Cost of Goods Sold
Inventory, 1/1/2006 P 37,800

Purchases P173,000
Transportation-in 13,500
Cost of purchases P186,500
Less: Purchases discounts taken P4,100
Purchases returns and allowances 6,200 (10,300)
Net purchases 176,200
Cost of goods available for sale P214,000
Less: Inventory, 12/31/2006 (34,100)
Cost of goods sold P179,900
Schedule 2: Selling Expenses
Sales commissions and salaries P 18,200

Sales supplies used 5,600
Delivery expense 7,700
Promotion and advertising expense 17,000
Total selling expenses P 48,500
Schedule 3: General and Administrative Expenses
Bad debt expense P 2,700

Office supplies expense 1,400
Insurance and property tax expense 8,500
Office and administrative salaries expense 32,000
Total general and administrative expenses P 44,600
18-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Schedule 4: Depreciation Expense
Buildings and office equipment P 14,500

Sales equipment 9,600
Total depreciation expense P 24,100
Requirement (2)
Salve Company
Income Statement
Sales P340,700
Less: Sales discounts taken P 4,900
Sales returns and allowances 12,100 (17,000)
Net sales P323,700
Cost of goods sold (Schedule 1) (179,900)
Gross profit P143,800
Operating expenses
Selling expenses (Schedule 2) P48,500
General and administrative expenses (Schedule 3) 44,600
Depreciation expense (Schedule 4) 24,100
Total operating expenses (117,200)
Operating income P 26,600
Other items
Rent revenue P 6,900
Interest expense (3,700)
Loss on sale of office equipment (5,000)
Loss from flood (12,000) (13,800)
Pretax income from continuing operations P 12,800
Income tax expense (P7,440 P3,600) (3,840)
Income from continuing operations P 8,960
Results from discontinued operations
Loss from operations of discontinued segment R
(net of P2,610 income tax credit) P(6,090)
Gain on disposal of segment R (net of P3,000
income taxes) 7,000 910
Net income P 9,870
Earnings per Ordinary Share

Components of Income (8,000 ordinary shares)
Income from continuing operations P1.12
Results from discontinued operations 0.11
Net income P1.23
Preparation of Audited Financial Statements 18-3
Note: Due to recently increased obsolescence, the sales equipment is being
depreciated over a shorter useful life. The related P9,600 depreciation expense for
2006 is P2,500 more than the amount that would have been reported using the
original useful life. This caused a decrease in 2006 income from continuing
operations and net income of P1,750 (after taxes) and a decrease in earnings per
share of P0.22.
Requirement (3)
Salve Company
Statement of Retained Earnings
Retained earnings, 1/1/2006 P183,700

Less: Prior period adjustment, correction of
understatement of 2005 depreciation expense (net
of P3,300 income tax credit) (7,700)
Adjusted retained earnings, 1/1/2006 P176,000
Add: Net income 9,870
P185,870
Less: Cash dividends (P0.60 per share) (4,800)
18-2. Mindanao Manufacturing Company
Requirement (1)
Mindanao Manufacturing Company

Schedule 1: Cost of Goods Sold
Raw materials used P 70,200

Direct labor 81,000
Factory overhead:
Factory superintendence salaries expense P25,000
Factory maintenance expense 7,000
Factory utilities expense 21,000
Factory indirect labor expense 23,000
Depreciation expense: factory 18,000 94,000
Current manufacturing costs P245,200
Add: Goods in process, 1/1/200 19,900
Less: Goods in process, 12/31/2006 (22,000)
Cost of goods manufactured P243,100
Add: Finished goods inventory, 1/1/2006 32,000
Cost of goods available for sale P275,100
Less: Finished goods inventory, 12/31/2006 (36,000)
Cost of goods sold P239,100
Schedule 2: Selling Expenses

Sales salaries expense P 27,400
Delivery expenses 11,700
Sales personnel travel expenses 8,300
Depreciation expense: sales equipment 9,000
Advertising expense 15,700
Total selling expenses P 72,100
Schedule 3: General and Administrative Expenses

Depreciation expense: buildings and office equipment P 14,400
Office and administrative salaries 30,000
Property taxes and insurance expense 9,000
Miscellaneous administrative expense 3,000
Total general and administrative expenses P 56,400
Requirement (2)
Income Statement
Sales P472,100
Less: Sales returns (5,000)
Net sales P467,100
Cost of goods sold (Schedule 1) (239,100)
Gross profit P228,000
Operating expenses
Selling expenses (Schedule 2) P72,100
General and administrative expenses (Schedule 3) 56,400
Other items
Interest revenue P 3,200
Miscellaneous rent revenue 5,900
Loss on sale of factory equipment (4,100)
Loss from expropriation (27,000) (22,000)
Pretax income from continuing operations P 77,500
Income tax expense (P31,350 P9,000) (22,350)
Income from continuing operations P 55,150
Loss from operations of discontinued segment E
(net of P4,800 income tax credit) P(11,200)
Gain on disposal of segment E (net of P12,600
income taxes) 29,400 18,200
Net income P 73,350
Earnings per Ordinary Share
Components of Income (20,000 ordinary shares)
Income from continuing operations P2.71
Results from discontinued operations 0.91
Net income P3.62
Requirement (3)

Statement of Retained Earnings

Less: Prior period adjustment, correction of
understated depreciation expense of 2005 (net of
P3,030 income tax credit) (7,700)
Adjusted retained earnings, 1/1/2005 P190,730
Add: Net income 73,350
P264,080
Less: Cash dividends (P1.20 per share) (24,000)
Requirement (4)
Return on shareholders equity = Net income

Average shareholders equity
= P73,350
P500,000
= 14.67%
Mindanao Manufacturing Companys return on shareholders equity for 2006 of

14.67% was below its target of 15%.
18-3.
1. Income statement; disclose as Other Items. Although the earthquake is
unusual in nature in this area and it is of infrequent occurrence, PAS 1 does
not allow presentation of extraordinary gain or loss in the Income Statement.
2. Income statement; disclose as Other Items. Same rationale as in (1).
3. Income statement; include in current depletion expense because it is a change

in accounting estimate. Disclose effect of change on net income and earnings
per share in a note.
4. Income statement; disclose as part of Other Items. Same reason as in (1).
5. Income statement; disclose as Other Items. Same reason as in (1).
6. Income statement; disclose as part of Other Items. Same reason as in (1).
7. Retained earnings statement; as a cumulative effect on prior years income of

a change in accounting principle.
8. Note; disclosure of the change in depreciation method may be made.
9. Income statement; disclose as part of Other Items.
10. Income statement; disclose in Results from Discontinued Operations. Since

the segment constitutes a major line of business and is distinguishable from
the remainder of the business, the gain (as well as the operating profit or loss)
is shown separately in Results from Discontinued Operations.
11. Statement of retained earnings; since it is a correction of last years income, it

should be disclosed as a prior period adjustment.
12. Income statement; disclose as Other Items.

18-4. Tigger Company
Tigger Company
Comparative Statements of Income
For the Year Ended December 31
2006 2005
a b
Sales P 2,900,000 P 3,900,000
c d
Cost of goods sold (980,000) (2,310,000)
Gross profit P 1,920,000 P 1,590,000
e f
Operating expenses (970,000) (1,390,000)
Operating income P 950,000 P 200,000
Other items:
Loss from obsolete inventory (150,000)
Casualty loss (60,000)
Gain on early retirement of bonds 250,000
g h
Miscellaneous (50,000) (90,000)
Pretax income from continuing
operations P 750,000 P 300,000
Income tax expense (30%) (225,000) (90,000)
Income from continuous operations P 525,000 P 210,000
Income (loss) from operations of
discontinued segment (net of
P90,000 income tax credit in
2006 and P90,000 income taxes
in 2005) (210,000) i 210,000 j
Net income P 315,000 P 420,000
a
P3,500,000 P400,000 P200,000
b
P4,600,000 P700,000
c
P1,600,000 P320,000 P300,000
d
P2,600,000 P290,000
e
P1,300,000 P180,000 P100,000
f
P1,500,000 P110,000
g
P(200,000) + P150,000 (disclosed in same section but as a separate line item)
h
P100,000 + P60,000 P250,000
i
(P600,000 P620,000 P280,000) x 70%
j
(P700,000 P290,000 P110,000) x 70%
Note: The properties of the discontinued segment should be reclassified as

Noncurrent Assets Held for Sale and valued at the lower of carrying value and fair
value less selling costs. Since the Expected Selling Price as of March 21, 2007 far
exceeds the carrying value, there is no indication that the company will incur loss
in write-down of assets of discontinued segment.
18-5. Inee Company
Requirement (1)
Inee Company
Income Statement
Sales revenues (net) P200,000

Cost of goods sold (121,120)
Gross profit P 78,880
Operating expenses
Selling expenses P26,000
Administrative expenses 16,000
Depreciation expense 7,000
Other items
Interest revenue P 1,000
Loss due to flood (5,000) (8,880)
Pretax income before extraordinary item P 21,000
Income tax expense (6,300)
Net income P 14,700
Earnings per share (5,000 ordinary shares) P2.94

Requirement (2)
Inee Company
Working Paper for Segment Reporting
For Year Ended December 31, 2006
(not required)
All Operating Segments Segment

1 2 Remaining Totals Unallocated Totals
Total revenues (sales) P 98,000 P60,000 P42,000 P200,000 P 0 P200,000
Operating expenses
Cost of goods sold P 60,760 P36,000 P24,360 P121,120 P 0 P121,120
Sales salaries 3,000 2,000 1,000 6,000 0 6,000
Sales commissions 1,960 1,200 840 4,000 0 4,000
Delivery costs 3,000 1,500 500 5,000 0 5,000
Advertising expense 4,600 3,200 1,500 9,300 1,200 10,500
Misc. selling expenses 0 0 0 0 500 500
Bad debts expense 980 600 420 2,000 0 2,000
Administrative salaries 4,000 2,300 1,600 7,900 2,100 10,000
Property taxes 560 490 350 1,400 1,600 3,000
Misc. administrative
expenses 0 0 0 0 1,000 1,000
Depreciation expense 2,240 1,680 1,680 5,600 1,400 7,000
Total operating
expenses P 81,100 P48,970 P32,250 P162,320 P 7,800 P170,120
Segment profit / operating
income P 16,900 P11,030 P 9,750 P 37,680 P(7,800) P 29,880
Segments assets P138,000 P84,000 P54,000 P276,000 P24,000 P300,000
Inee Company
Industry Segment Financial Results
Reportable Operating Segments All Other Total

1 2 Segments Results
Segment revenues (sales) P 98,000 P 60,000 P 42,000 P200,000
Segment profit (pretax) P 16,900 P 11,030 P 9,750 P 37,680
General corporate expenses (7,800)
Interest revenue 1,000
Loss due to flood (5,000)
P 21,000
Identifiable assets at
December 31, 2006 P138,000 P 84,000 P 54,000 P276,000
General corporate assets 24,000
Total assets at
December 31, 2006 P300,000
Requirement (3)
Segment profit is total revenue less operating expenses. In computing segment

profit, none of the following items has been added or deducted: general corporate
expenses, interest revenue, interest expense, income taxes, or the flood loss
(relating to the companys operations in Division 1).
Depreciation for Divisions 1 and 2 was P2,240 and P1,680, respectively. Capital
expenditures amounted to P25,000 in Division 1 and P6,000 in Division 2 during
2006 and are included in the total assets on December 31, 2006.
18-6. Lawin Company
Lawin Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash P 190,000
Temporary investments in
marketable securities 280,000
Accounts receivable P590,000
Less: Allowance for doubtful
accounts (80,000) 510,000
Inventory 600,000
Prepaid items:
Insurance P120,000
Office supplies 80,000 200,000
Total current assets P1,780,000
Long-term Investments
Investment in held-to-maturity bonds 1,030,000
Plant and Equipment
Land P 810,000
Buildings and equipment P3,560,000
Less: Accumulated depreciation (920,000) 2,640,000
Total plant and equipment 3,450,000
Intangible Assets
Patents (net) 470,000
Total Assets P6,730,000
Liabilities
Current Liabilities
Accounts payable P1,020,000
Salaries payable 150,000
Taxes payable 250,000
Unearned rent 90,000
Total current liabilities P1,510,000
Long-Term Liabilities
Bonds payable (due 2012) P1,100,000
Less: Discount on bonds payable (100,000)
Total long-term liabilities 1,000,000
Total Liabilities P2,510,000
Shareholders Equity
Contributed Capital
Ordinary shares, P10 par P1,200,000
Premium on ordinary shares 930,000
Total contributed capital P2,130,000
Retained Earnings 2,420,000
Total contributed capital and retained
earnings P4,550,000
Less: Treasury shares (at cost) (330,000)
Total Shareholders Equity P4,220,000
Total Liabilities and Shareholders Equity P6,730,000
18-7. Blue Manufacturing Company
Blue Manufacturing Company

Balance Sheet
December 31, 2006
Assets
Current Assets
Cash P 6,100
Marketable securities (short-term) 8,400
Less: Allowance for doubtful
accounts (1,000) 14,300
Inventory 6,000
Raw materials P10,100
Goods in process 14,700
Finished goods 23,800 48,600
Prepaid insurance 2,600
Total current assets P 80,000
Long-term Investments
Bond sinking fund P 7,700
Investment in available-for-sale shares 16,400
Total long-term investments 24,100
Plant and Equipment

Land P17,000
Buildings P92,500
Less: Accumulated depreciation (32,400) 60,100
Machinery and equipment P57,800
Total property, plant and
equipment 104,900
Intangible Assets
Patents (net) 8,600
Total Assets P217,600
Liabilities
Current Liabilities
Notes payable P 4,900
Accounts payable 20,900
Interest payable 500
Wages payable 2,700
Dividends payable 5,600
Income taxes payable 8,900
Unearned rent 5,000
Total current liabilities P 48,500
Bonds payable (due 2020) P28,000
Less: Discount on bonds payable (2,500) P 25,500
Accrued pension cost 13,300
Total long-term liabilities 38,800
Other Liabilities
Deferred taxes payable 2,800
Total Liabilities P 90,100
Shareholders Equity
Contributed Capital
Preference shares, P100 par P 30,000
Ordinary shares, P10 par 44,100
Premium on preference shares 7,000
Total contributed capital P 97,400
Retained Earnings 28,100
Accumulated Other Comprehensive
Income
Unrealized increase in value of
available-for-sale shares 2,000
Total Shareholders Equity P127,500
Total Liabilities and Shareholders Equity P217,600
Additional parenthetical or note disclosures which might be made include:
1. Inventory costing and valuation method(s) for raw materials, goods in
process, and finished goods.
2. Valuation method for marketable securities and investment in shares.
3. Number of preference and common shares authorized and issued.
4. Pension plan information.
5. Bond indenture provisions, including sinking fund information.
Working capital = Current assets Current liabilities
P31,500 = P80,000 P48,500
Current ratio = Current assets Current liabilities
1.65 = P80,000 P48,500
18-8. Nick Company

Nick Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash P 3,800
Temporary investments in
available-for-sale securities 4,600
Less: Allowance for doubtful accounts (700) 17,800
Inventory 30,500
Prepaid insurance 2,900
Noncurrent Investments
Notes receivable (due 2013) P 10,000
Investment in Day Company bonds 9,000
Sinking fund for bond retirement 7,000
Total long-term investments 26,000
Property, Plant and Equipment
Land P 12,000
Buildings P63,400
Equipment P29,600
equipment 71,000
Intangible Assets
Patents (net) P 5,900
Trademarks (net) 3,700
Total intangible assets 9,600
Liabilities
Current Liabilities
Accounts payable P 19,400
Wages payable 4,100
Current portion of mortgage payable 4,000
Mortgage payable P 16,000
Bonds payable (due 2017) P40,000
Add: Premium on bonds payable 4,300 44,300
Shareholders Equity
Contributed Capital
Ordinary shares, P5 par 11,000
Premium on preference shares 2,400
Total contributed capital P 34,100
Income
Unrealized increase in value of
available-for-sale securities 1,100
Total contributed capital, retained
earnings and accumulated other
comprehensive income P 73,000
Less: Treasury shares (at cost) (1,800)
Total Shareholders Equity P 71,200
18-9. Hera Manufacturing Corporation
Hera Manufacturing Company

Balance Sheet
December 31, 2006
Assets
Current Assets
Cash P 109,000 a
b
Accounts receivable (net) 317,700
Inventories 560,000
c, j
Long-term Investment, at market value 47,000
Property, Plant, and Equipment at cost
Land P 200,000 d
Buildings P1,750,000
Machinery and equipment 1,964,000
Total P3,714,000
Less: Accumulated depreciation (420,000) 3,294,000
equipment 3,494,000
Intangible Asset
Goodwill 37,000
Other Assets
Cash restricted for building
purposes P 100,000 a
Officers note receivable 1 30,000 b
Land held for future building site 250,000 d 380,000

Total Assets P4,944,700
Liabilities and Shareholders Equity

Current Liabilities
Accounts payable P 119,800 e
Current installments of long-term

debt 200,000 f, g
Lawsuit liability 80,000

h
Deferred tax liability 5,000
Long-Term Debt
f
Mortgage payable P 800,000
Note payable 400,000 g
Deferred tax liability 23,000

Total long-term debt 1,223,000
Total Liabilities P1,649,000
Shareholders Equity
Ordinary shares, authorized
100,000 shares of P50 par
value; issued 40,000 shares;
i
outstanding 39,800 shares P2,000,000
i
Additional paid-in capital 231,000
Total paid-in capital P2,231,000
Loss
Unrealized decrease in value of
long-term investment (4,300) j
Retained Earnings 1,075,400

Total P3,302,100
Less: Cost of treasury shares (6,400) c
Total Shareholders Equity 3,295,700

Total Liabilities and Shareholders Equity P4,944,700
1 Alternatively, this could be reported under Long-Term Investments
Explanation of Amounts
a Cash, per unaudited balance sheet P225,000
Less: Unrecorded checks in payment of accounts
payable (14,000)
NSF check not recorded (2,000)
Cash restricted for building purposes
(reported in other assets) (100,000)
Corrected balance P109,000
b
Accounts receivable (net), per unaudited balance sheet P345,700
Add charge-back for NSF check [see (a)] 2,000
Less: Officers note receivable (reported in other
assets) (30,000)
c
Investments, per unaudited balance sheet P 57,700
Less: Long-term investment [reported separately,
see (j)] (51,300)
Treasury shares (reported in shareholders
equity) (6,400)
Corrected balance P 0
d
Land, per unaudited balance sheet P450,000
Less: Land acquired for future building site
(reported in other assets) (250,000)
e Accounts payable, per unaudited balance sheet P133,800
Less: Unrecorded payments [see (a)] (14,000)
f Mortgage payable, per unaudited balance sheet P900,000
Less: Current portion (P50,000 x 2) (100,000)
Refinanced as long-term mortgage payable P800,000
g
Note payable, per unaudited balance sheet P500,000
Less: Current portion (100,000)
Long-term note payable P400,000
h
Income taxes payable, per unaudited balance sheet P 61,200
Less: Prepaid income taxes (40,000)
Corrected balance P 21,200
i Ordinary shares, per unaudited balance sheet P2,231,000
Less: Additional paid-in capital in excess of par value (231,000)
Corrected balance P2,000,000
j Long-term investment, at cost [see (c)] P 51,300
Less: Unrealized decrease in value (4,300)
Long-term investment, at market value P 47,000
18-10. Kiko Company
Kiko Company
Balance Sheet
December 31, 2006
Assets
Current Assets
a
Cash P 2,900
b
Accounts receivable (net) 5,000
c
Inventory 4,200
Total current assets P12,100
d
Land P 6,800
e
Buildings and equipment P 82,800
f
equipment 73,600
Liabilities
Current Liabilities
g
h
Salaries payable 1,500
Bonds payable P 6,000
i
Less: Discount on bonds payable (300)
Total Liabilities P10,200
Shareholders Equity
Contributed Capital
j
Ordinary shares, P5 par P16,500
k
Additional paid-in capital 12,700
Total contributed capital P29,200
l
Total Shareholders Equity P75,500
a
Last item on statement of cash flows
b
P5,000 = P3,900 + P1,100
c
P4,200 = P4,700 P500
d
P6,800 = P9,800 P3,000 sold
e
P82,800 = P68,900 + P13,900 purchased
f
P16,000 = P14,100 + P1,900 annual depreciation
g
P3,000 = P4,000 P1,000
h
P1,500 = P1,100 + P400
i
P300 = P6,000 face value P5,700 issue price
j
P16,500 = P13,500 + P3,000 issued
k
P12,700 = P11,200 + P1,500 in excess
l
P46,300 = P44,400 + P5,000 net income P3,100 dividends
18-11. Lifer Company
Lifer Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash P 1,200
Accounts receivable 4,000
Inventories 10,890
Prepaid items 1,420
Land P 13,600
Buildings P103,000
Equipment 18,100 P121,100
Less: Accumulated
depreciation (32,520) 88,580
Total property, plant and equipment 102,180
Patents (net) 5,500
Liabilities
Current Liabilities
Miscellaneous payable 1,400
10% bonds payable P15,000
Less: Discount on bonds payable (900) P14,100
Mortgage payable 20,000
Shareholders Equity

Premium on preference shares 2,300 P23,300
Ordinary shares, P10 par P17,500
Premium on ordinary shares 14,300 31,800
Total Shareholders Equity 80,300
Supporting calculations (for Balance Sheet):
Balance Balance
Account 1/1/06 Calculations 12/31/06
Cash P 1,900 Decreased (P700) from 1/1/06 P 1,200
Accounts
receivable 5,100 Decreased (P1,100) from 1/1/06 4,000
Inventories 13,900 Decreased (P3,010) from 1/106 10,890
Prepaid items 1,300 Increased P120 from 1/1/06 1,420
Land 12,000 Received for land P(2,800)
Add loss on sale (400)
Cost of land sold P(3,200)
Land purchased by shares 4,800
Net change in land P 1,600 13,600
Buildings 60,000 Purchase of building P43,000
* Note: Mortgage account
will be included under
long-term liabilities 103,000
Equipment 20,000 Cost of equipment sold P(1,900) 18,100
Accumulated Change in accumulated depreciation:
depreciation (29,000)
Cost of equipment sold P(1,900) Cr
Gain on sale of equipment (180) Cr
Proceeds from sale 500 Dr
Reduction in accumulated
depreciation P 1,580 Dr
Current depreciation (5,100) Cr
Increase in accumulated
depreciation P(3,520) Cr (32,520)
Patents (net) 7,100 Amount received for

patent P(2,100)
Less: Gain on sale 1,100
Carrying value sold P(1,000)
Add: Patents amortized (600)
Net decrease P(1,600) 5,500
Accounts payable 5,500 Decreased P(400) from 1/1/06 5,100
Income taxes
payable 4,100 Increased P190 from 1/1/06 4,290
Misc. payables 1,200 Increased P200 from 1/1/06 1,400
10% bonds payable 15,000 No change 15,000
Discount on bonds
payable (1,000) Amortization P100 (900)
Mortgage payable 0 Incurred in purchase of building,
P20,000 20,000
Preference shares 17,000 Issued 40 shares for land
40 x P100 par = P4,000 21,000
Premium on Value from issuance for land P 4,800
preference 1,500 Less: Par value of issue (4,000)
shares Increase in premium P 800 2,300
Ordinary shares, Issue 150 shares @ P10 par = P1,500
P10 par 14,000 Share dividend 200 shares
@ P10 par = 2,000
Total increase P3,500 17,500
Premium on Value of shares issued
ordinary shares 11,200 for cash P3,000
Par value of shares issued (1,500)
Increase in premium P1,500
Value of share dividend
200 @ P18 P3,600
Par value of shares issued (2,000)
Increase in premium P1,600
Total increase:
P1,500 + P1,600 = P3,100 14,300
Retained earnings 23,800 Add: Net income P10,000
Less: Cash dividend (5,000)
Less: Share dividend (3,600)
Increase in retained earnings P 1,400 25,200
18-12. Harry Company
Requirement (1)
Harry Company
Worksheet for Statement of Cash Flows
12/3/1/05 Post-Closing 12/31/06 Adjusted
Trial Balance Trial Balance Change Worksheet Entries
Accounts Debit Credit Debit Credit Debit Credit Debit Credit
Cash 2,700 3,300 600 (s) 600
Accounts receivable 7,300 6,200 1,100 (i) 1,100
Inventory 8,100 9,900 1,800 (j) 1,800
Investment in bonds 10,000 18,600 8,600 (n) 8,600
Property and equipment 105,300 133,300 28,000 (o) 28,000
Accumulated depreciation 42,400 49,200 6,800 (h) 6,800
Accounts payable 8,100 8,500 400 (k) 400
Salaries payable 1,300 700 600 (l) 600
Interest payable 0 300 300 (m) 300
Notes payable 0 9,000 9,000 (p) 9,000
Ordinary shares, no par 43,600 58,100 14,500 (r) 14,500
Retained earnings 38,000 31,500 6,500 (q) 6,500
Sales 89,000 89,000 (a) 89,000
Cost of goods sold 48,800 48,800 (c) 48,800
Depreciation expense 6,800 6,800 (h) 6,800
Salaries expense 12,000 12,000 (d) 12,000
Other operating expenses 1,700 1,700 (f) 1,700
Interest revenue 1,200 1,200 (b) 1,200
Interest expense 900 900 (e) 900
Income tax expense 6,000 6,000 (g) 6,000
Totals 133,400 133,400 247,500 247,500 122,300 122,300 122,300 122,300
(Worksheet continued on next page)
18-12. Harry Company (continued. . . . .)
Requirement (1) continued . . . . .
Worksheet Entries
Debit Credit
Cash Flows From Operating Activities
Collections from customers (a) 89,000
(i) 1,100
Interest and dividends collected (b) 1,200
Other operating receipts --
Payments to suppliers (k) 400 (c) 48,800
(j) 1,800
Payments to employees (d) 12,000
(l) 600
Payments of interest (m) 300 (e) 900
Other operating payments (f) 1,700
Payments of income taxes (g) 6,000
Cash Flows From Investing Activities

Payment for purchase of investments (n) 8,600
Payment for purchase of building (o) 28,000
Cash Flows From Financing Activities

Proceeds from issuance of note payable (p) 9,000
Proceeds from issuance of ordinary shares (r) 14,500
Payment of dividends (q) 6,500
Net Increase in Cash (s) 600

Totals 115,500 115,500
18-12. Harry Company (continued. . . . .)
Requirement (2)
Harry Company
Statement of Cash Flows
Cash Flows From Operating Activities

Cash Inflows:
Collections from customers P 90,100
Interest collected 1,200
Cash inflows from operating activities P 91,300
Cash Outflows:
Payments to suppliers P(50,200)
Payments to employees (12,600)
Payments of interest (600)
Other operating payments (1,700)
Payments of income taxes (6,000)
Cash outflows from operating activities (71,100)
Net cash provided by operating activities P 20,200
Cash Flows From Investing Activities
Payment for purchase of investments P (8,600)
Payment for purchase of building (28,000)
Net cash used for investing activities (36,600)
Cash Flows From Financing Activities
Proceeds from issuance of note payable P 9,000
Proceeds from issuance of ordinary shares 14,500
Payment of dividends (6,500)
Net cash provided by financing activities 17,000
Net Increase in Cash P 600
Cash, January 1, 2006 2,700
Cash, December 31, 2006 P 3,300
18-13. Serene Company
Serene Company
Statement of Changes in Shareholders Equity
Additional Additional
Paid-in Paid-in Accumulated
Preference Ordinary Capital on Capital on Other
Shares Shares Preference Ordinary Retained Comprehensive Treasury
P100 par P10 par Shares Shares Earnings Income Shares Total
Balances, 1/1/06 P50,000 P100,000 P6,000 P130,000 P224,000 P510,000
Unrealized increase in
value of available-for-
sale securities P9,000 9,000
Ordinary shares issued 20,000 30,000 50,000
Preference shares issued 11,000 1,760 12,760
Ordinary shares P(10,400) (10,400)
reacquired
Net income 57,000 57,000
Cash dividend paid on
preference* (4,270) (4,270)
Cash dividend paid on
ordinary (14,500) (14,500)
Balances, 12/31/06 P61,000 P120,000 P7,760 P160,000 P262,230 P9,000 P(10,400) P609,590
* Preference dividend: P7 x (500 + 110 shares) = P4,270.
* Ordinary dividend: P1.25 x (10,000 + 2,000 400 treasury shares) = P14,500.

18-14. Circle Company
CIRCLE COMPANY
Schedule to Analyze Effects of Errors
Balance Sheet
Dec. 31, 2007
Income 2005 Income 2006 Income 2007 Amount
Explanation Debit Credit Debit Credit Debit Credit Debit Credit Account
1. Sales tax accrual omitted:
December 31, 2005 2,000a 2,000
December 31, 2006 5,000 5,000
December 31, 2007 9,000 9,000 Sales taxes payable
2. Accounts payable and inventory omitted: No correction because errors offset each other
3. Inventory recorded twice 4,000 4,000
4. Bad debtsb 5,000 1,000 2,200 8,200 Allowance for doubtful
accounts
5. Bond premium 1,200 1,200 12,000 9,600 Additional paid-in
capital, Bond premium
6. Travel advances 18,000 18,000
7. Salary accrual 10,000 11,000 10,000 7,000 11,000 7,000 Salaries payable
8. Cost misclassification 5,000c 25,000 5,000 5,000 15,000 Accumulated depreciation
a
The correct sales tax expense for 2005 is P12,000 (P200,000 x 6%). Since P10,000 was recorded in 2005, the correcting amount is
P2,000. However, this P2,000 would have been recorded by the company in 2006, so the total recorded sales tax expense of
P15,000 includes only P13,000 for sales made in 2006. Therefore the correct balance of P18,000 (P300,000 x 6%) is obtained by a
correcting amount of P5,000. Similarly, in 2007 the P5,000 would have been recorded by the company, so the total recorded sales
tax expense of P26,000 includes only P21,000 for sales made in 2004. Therefore the correct balance of P30,000 (P500,000 x 6%)
is obtained by a correcting amount of P9,000.
b
Since bad debts were written off each year directly to bad debts expense, the increase in the Allowance for Doubtful Accounts
balance each year represents the additional bad debts expense.
c
The residual value is ignored because it would have been included in the computation of the depreciation on the machine.

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CHAPTER

18-1. Salve Company

Inventory, 1/1/2006 P 37,800

Schedule 2: Selling Expenses

Sales commissions and salaries P 18,200

Schedule 3: General and Administrative Expenses

Bad debt expense P 2,700

Schedule 4: Depreciation Expense

Buildings and office equipment P 14,500

Earnings per Ordinary Share

Retained earnings, 1/1/2006 P183,700

18-2. Mindanao Manufacturing Company

Mindanao Manufacturing Company

Raw materials used P 70,200

Schedule 2: Selling Expenses

Schedule 3: General and Administrative Expenses

Mindanao Manufacturing Company

Retained earnings, 1/1/2006 P197,800

Return on shareholders equity = Net income

Mindanao Manufacturing Companys return on shareholders equity for 2006 of

2. Income statement; disclose as Other Items. Same rationale as in (1).

3. Income statement; include in current depletion expense because it is a change

4. Income statement; disclose as part of Other Items. Same reason as in (1).

5. Income statement; disclose as Other Items. Same reason as in (1).

6. Income statement; disclose as part of Other Items. Same reason as in (1).

7. Retained earnings statement; as a cumulative effect on prior years income of

8. Note; disclosure of the change in depreciation method may be made.

9. Income statement; disclose as part of Other Items.

10. Income statement; disclose in Results from Discontinued Operations. Since

11. Statement of retained earnings; since it is a correction of last years income, it

12. Income statement; disclose as Other Items.

Net income P 315,000 P 420,000

Note: The properties of the discontinued segment should be reclassified as

18-5. Inee Company

Sales revenues (net) P200,000

Earnings per share (5,000 ordinary shares) P2.94

All Operating Segments Segment

Segments assets P138,000 P84,000 P54,000 P276,000 P24,000 P300,000

Reportable Operating Segments All Other Total

Segment profit is total revenue less operating expenses. In computing segment

18-6. Lawin Company

18-7. Blue Manufacturing Company

Blue Manufacturing Company

Plant and Equipment

18-8. Nick Company

18-9. Hera Manufacturing Corporation

Hera Manufacturing Company

Officers note receivable 1 30,000 b

Land held for future building site 250,000 d 380,000

Liabilities and Shareholders Equity

Current installments of long-term

Lawsuit liability 80,000

Deferred tax liability 23,000

Retained Earnings 1,075,400

Total Shareholders Equity 3,295,700

18-11. Lifer Company

Preference shares, P100 par P 21,000

Supporting calculations (for Balance Sheet):

Patents (net) 7,100 Amount received for

Requirement (1) continued . . . . .

Cash Flows From Investing Activities

Cash Flows From Financing Activities

Net Increase in Cash (s) 600