PREPARATION OF AUDITED
18 FINANCIAL STATEMENTS
Requirement (1)
Salve Company
For the Year Ended December 31, 2006
Schedule 1: Cost of Goods Sold
Requirement (2)
Salve Company
Income Statement
For the Year Ended December 31, 2006
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
Requirement (3)
Salve Company
Statement of Retained Earnings
For the Year Ended December 31, 2006
Requirement (1)
Requirement (2)
Mindanao Manufacturing Company
Income Statement
For the Year Ended December 31, 2006
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
Total operating expenses (128,500)
Operating income P 99,500
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
Results from discontinued operations
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
Preparation of Audited Financial Statements 18-5
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)
Requirement (4)
= P73,350
P500,000
= 14.67%
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.
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
Results from discontinued operations
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
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
18-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition
i
(P600,000 P620,000 P280,000) x 70%
j
(P700,000 P290,000 P110,000) x 70%
Requirement (1)
Inee Company
Income Statement
For the Year Ended December 31, 2006
Inee Company
Working Paper for Segment Reporting
For Year Ended December 31, 2006
(not required)
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
Inee Company
Industry Segment Financial Results
For Year Ended December 31, 2006
Requirement (3)
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.
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
Preparation of Audited Financial Statements 18-11
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
Assets
Current Assets
Cash P 6,100
Marketable securities (short-term) 8,400
Accounts receivable P15,300
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
18-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition
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
Long-Term Liabilities
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
Premium on ordinary shares 16,300
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
Preparation of Audited Financial Statements 18-13
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
Liabilities
Current Liabilities
Accounts payable P 19,400
Income taxes payable 7,200
Wages payable 4,100
Current portion of mortgage payable 4,000
Total current liabilities P 34,700
Long-Term Liabilities
Mortgage payable P 16,000
Bonds payable (due 2017) P40,000
Add: Premium on bonds payable 4,300 44,300
Total long-term liabilities 60,300
Total Liabilities P 95,000
Shareholders Equity
Contributed Capital
Preference shares, P100 par P 6,000
Ordinary shares, P5 par 11,000
Premium on preference shares 2,400
Premium on ordinary shares 14,700
Total contributed capital P 34,100
Retained Earnings 37,800
Accumulated Other Comprehensive
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
Total Liabilities and Shareholders Equity P166,200
Assets
Current Assets
Cash P 109,000 a
b
Accounts receivable (net) 317,700
Inventories 560,000
Total current assets P 926,700
c, j
Long-term Investment, at market value 47,000
Preparation of Audited Financial Statements 18-15
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
Total property, plant and
equipment 3,494,000
Intangible Asset
Goodwill 37,000
Other Assets
Cash restricted for building
purposes P 100,000 a
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
Property, Plant and Equipment
d
Land P 6,800
e
Buildings and equipment P 82,800
f
Less: Accumulated depreciation (16,000) 66,800
Total property, plant and
equipment 73,600
Total Assets P85,700
Liabilities
Current Liabilities
g
Accounts payable P 3,000
h
Salaries payable 1,500
Total current liabilities P 4,500
Long-Term Liabilities
Bonds payable P 6,000
i
Less: Discount on bonds payable (300)
Total long-term liabilities 5,700
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
Retained Earnings 46,300
Total Shareholders Equity P75,500
Total Liabilities and Shareholders Equity P85,700
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
18-18 Solutions Manual to Accompany Applied Auditing, 2006 Edition
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
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
Total current assets P 17,510
Property, Plant and Equipment
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
Total Assets P125,190
Liabilities
Current Liabilities
Accounts payable P 5,100
Income taxes payable 4,290
Miscellaneous payable 1,400
Total current liabilities P 10,790
Long-Term Liabilities
10% bonds payable P15,000
Less: Discount on bonds payable (900) P14,100
Mortgage payable 20,000
Total long-term liabilities 34,100
Total Liabilities P 44,890
Preparation of Audited Financial Statements 18-19
Shareholders Equity
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)
18-20 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Requirement (1)
Harry Company
Worksheet for Statement of Cash Flows
For Year Ended December 31, 2006
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)
18-22 Solutions Manual to Accompany Applied Auditing, 2006 Edition
18-12. Harry Company (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
Requirement (2)
Harry Company
Statement of Cash Flows
For Year Ended December 31, 2006
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
18-24 Solutions Manual to Accompany Applied Auditing, 2006 Edition
18-13. Serene Company
Serene Company
Statement of Changes in Shareholders Equity
For Year Ended December 31, 2006
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
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.