Accounting Review 2 Auditing

Financial Statement Basic Audit Adjustments

Problem 1
Below is the trial balance as of December 31, 20x2 of Sampaguita Company, as prepared by its accountant.

Sampaguita Company
Trial Balance
December 31, 20x2
Cash ₱191,000
Accounts receivable 615,000
Allowance for doubtful accounts ₱ 21,000
Inventory, 12.31.20x1 584,000
Prepaid expenses 8,000
Investments 110,000
Furniture and equipment 312,000
Miscellaneous equipment 90,000
Accumulated depreciation 76,400
Accounts payable 543,000
Accrued expenses 51,000
Unearned rent income 12,800
Ordinary share capital 600,000
Retained earnings 182,800
Sales 3,500,000
Rent income 48,000
Purchases 2,424,000
Salaries expense 400,000
Advertising expense 124,000
Commission expense 80,000
Utilities expense 32,000
Supplies expense 12,000
Transportation expense 14,000
Repairs and maintenance 16,000
Miscellaneous expense 23,000
₱5,035,000 ₱5,035,000

You have gathered the following information for adjustment:

1. The Cash account included equipment fund amounting to ₱60,000.
2. A physical inventory taken on December 31, 20x2 revealed goods costing ₱600,000.
3. Goods purchased under FOB shipping point and verified to have been shipped by the supplier on December
28, 20x2 were received and recorded by Sampaguita on January 4, 20x3, ₱50,000.
4. The allowance for doubtful accounts should be adjusted to 5% of accounts receivable.
5. The company purchased 100 shared of its ₱100 par value ordinary share capital for ₱30,000. The amount
having been charged to the Investment account.
6. Except for equipment purchased on June 30, 20x2 for ₱20,000 cash, all equipment were acquired at the
inception of the company three years ago. Depreciation for 20x2 has not been recorded.
7. Prepaid expenses include ₱4,800 insurance premium on a one-year insurance policy taken on October 1,
20x2.
8. Unearned rent income on December 31, 20x2 amounted to ₱10,000.
9. Accrued expenses on December 31, 20x2 amounted to ₱54,000.

Prepare a working paper to facilitate the preparation of the financial statements for the year ended December 31,
20x2. (Trial balance, Adjustment, Profit or Loss, Financial Position)

Rey Joseph M. Redoblado | 1

Accounting Review 2 Auditing
Financial Statement Basic Audit Adjustments

Problem 2
The trial balance of Carabao Corporation prior to the closing of its accounts for the fiscal year ended September 30,
20x2 is as follows:
Debit Credit
Cash ₱225,000
Accounts receivable 936,000
Allowance for doubtful accounts ₱31,900
Notes receivable 155,000
Merchandise inventory 568,900
Furniture and equipment 618,000
Accumulated depreciation 187,500
Goodwill 300,000
Accounts payable 536,000
Notes payable 100,000
Ordinary share capital 1,000,000
Retained earnings 552,500
Sales 3,728,200
Sales returns and allowances 47,600
Purchases 2,159,300
Purchase returns and
allowances 36,500
Advertising expense 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expense 29,900
Rent expense 130,000
Office salaries 197,200
Light and water 15,000
Insurance expense 10,800
Taxes and licenses 47,800
General expenses 163,400
Interest expense 41,200
Interest income 9,100
₱6,181,700 ₱6,181,700

Your examination of the company’s accounts has indicated the need for adjustments based on the following
information:
1. The Cash account includes a customer check for ₱15,000 deposited on September 25, 20x2 but returned by the
bank on September 30, 20x2 for lack of countersignature. No entry was made by the company for the return of
the check or its redeposit on October 5, 20x2.
2. The allowance for doubtful accounts should be adjusted to 5% of the customers’ outstanding balance as of
September 30, 20x2.
3. A physical inventory taken of the merchandise stock as of the close of the fiscal year amounted to ₱601,200.
4. A purchase of merchandise, FOB shipping point, for which goods costing ₱50,000 were in transit on September
30, 20x2, was neither taken as a liability nor included in the inventory on that date.
5. Good received on consignment, still unsold, were included in the inventory at the agreed selling price of ₱30,000.
6. The merchandise inventory at September 30, 20x1 was correctly stated.
7. On July 1, 20x2, equipment acquired on October 1, 19x9 with a carrying value of ₱32,000 on September 30,
20x1, was sold for ₱35,000 cash. The sales proceeds were credited to the furniture and equipment accounts.
8. Depreciation for the fiscal year 20x1 – 20x2 has not yet been recorded. Depreciation rate is 10%.
9. An insurance policy was renewed on the inventory and equipment on April 1, 20x2 with the annual premium of
₱8,400 paid on that date.
10. The rent expense account consisted of rent paid for store and office space for thirteen months ending October
31, 20x2.
11. The one-year Note payable of ₱100,000 was discounted at the bank at 12% on August 31, 20x2.
12. The Goodwill account was set up by a credit to Retained earnings under a resolution of the Board of Directors.
13. The company is subject to income tax rate of 30%. Ignore the deferred portion of the income tax.

Prepare a working paper to facilitate the preparation of the financial statements for the year ended September 30,
20x2. (Trial balance, Adjustment, Profit or Loss, Financial Position)

Rey Joseph M. Redoblado | 2

Accounting Review 2 Auditing
Financial Statement Basic Audit Adjustments

Problem 3
Selected account balances (before adjustments) taken from the books of Narra, Inc. for the year ended December
31, 20x2 are as follows:

Retained earnings, January 1, 20x2 ₱881,340

Sales salaries and commissions 70,000
Advertising expense 32,180
Legal services 4,450
Insurance and licenses 17,000
Salesmen’s traveling expenses 7,120
Depreciation expense - delivery equipment 12,200
Depreciation expense - office equipment 9,600
Interest revenue 1,400
Utilities 12,800
Telephone and postage 2,950
Supplies inventory 4,360
Miscellaneous selling expenses 4,400
Dividends 66,000
Dividend revenue 14,300
Interest expense 9,040
Allowance for doubtful accounts 740 Credit
Officers' salaries 73,200
Sales 990,400
Sales returns and allowances 22,400
Sales discounts 1,760
Gain on sale of equipment 37,000
Inventory, January 1, 20x2 179,400
Inventory, December 31, 20x2 41,100
Purchases 346,000
Freight in 11,050
Accounts receivable 522,000
Extraordinary loss, before income tax 145,200
Ordinary share capital 78,000

Data for adjustment:

1. Cost of inventory in the possession of consignees as of December 31, 20x2 was not included in the ending
inventory balance, ₱67,200.
2. After aging the accounts receivable, a decision was made to increase the allowance for doubtful accounts to 3%
of the ending accounts receivable balance.
3. Sales commission for the last day of the year had not been accrued. Total sales on December 31 were ₱27,200.
Sales commission averages to 3% of sales.
4. No accrual had been made for a freight bill received on January 5, 20x3, for goods received on December 29,
20x2, ₱1,500.
5. An advertising campaign was initiated November 1, 20x2. The cost of ₱4,200 incurred in November and
December was debited to prepaid advertising.
6. Freight charges of ₱18,400 paid on sold merchandise and not passed on to the buyers were netted against
sales.
7. Depreciation on a new equipment purchased on March 1, 20x2 had not been recognized. Equipment are
depreciated on a straight-line basis, salvage value being ignored. This equipment was purchased for ₱15,600
and is estimated to be useful for 10 years.
8. The Extraordinary loss represents loss from supplies lost and unusable inventories heavily damaged by flood in
August.
9. Income tax rate is 30%.

Prepare adjusting entries. Then, present two separate statement of comprehensive income following the function of
expense and the nature of expense.

Rey Joseph M. Redoblado | 3