APPLIED AUDITING BASIC AUDIT R.F.

RAMOS

Problem 1
The trial balance of Cielo Corporation, prior to the closing of its accounts for the fiscal year ended
September 30, 2018 is as follows:

Debit Credit
Cash P 225,000
Accounts receivable 936,000
Allowance for doubtful accounts P 31,900
Notes receivable 155,000
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 & allowances 47,600
Purchases 2,159,300
Purchase returns & allowances 36,500
Advertising expense 96,100
Sales salaries 288,500
Commission expense 152,000
Miscellaneous selling expenses 29,900
Rent expense 130,000
Office salaries 197,200
Utilities expenses 15,000
Insurance expense 10,800
Taxes & licenses 47,800
Miscellaneous administrative expenses 163,400
Interest expense 41,200
Interest income 9,100
P6,181,700 P6,181,700

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’s check for P15,000 that was deposited on September 25,
2018 but returned by the bank on September 29,2018 for lack of countersignature. No entry was
made by the client for the return of the check or its re-deposit on October 5, 2018.

2. Based on an aging schedule, the allowance for doubtful accounts should be adjusted to 5% of the
customers’ outstanding balance as of September 30, 2018.

3. A physical inventory taken on the stocks as of the close of the fiscal year amounted to P601,200.

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4. A purchase of merchandise, FOB Shipping Point, for which goods costing P50,000 were in transit
on September 30, 2018, was neither taken as a liability nor included in the inventory on that date.

5. Goods received on consignment, still unsold, were included in the inventory at the agreed selling
price of P30,000.

6. The inventory at September 30, 2017 was correctly stated.

7. On July 1, 2018, equipment acquired on October 1, 2015 with a carrying value of P32,000 on
September 30, 2017, was sold for P35,000 on a COD basis. The sales proceeds were credited to the
Furniture and Equipment account.

8. Depreciation for fiscal year 2017-2018 has not been recorded. Depreciation rate is 10%.

9. An insurance policy on the inventory and equipment was renewed on April 1, 2018 with the
annual premium of P8,400 paid on that date.

10. The Rent Expense account consisted of rent paid for store and office space for thirteen months
ending October 31, 2018.

11. The one-year Note Payable of P100,000 was discounted at the bank at 12% on August 31, 2018.

12. The Goodwill account was set up by a credit to Retained Earnings under a resolution by the
Board of Directors.

Required: Prepare adjusting journal entries at September 30, 2018.

Problem 2
Selected account balances, before adjustments, taken from the books of Flawless, Inc. for the year
ended December 31, 2018 are as follows:

Retained earnings, January 1, 2018 P 881,340

Sales salaries and commissions 70,000
Advertising expense 32,180
Legal services 4,450
Insurance and licenses 17,000
Salesmen’s traveling expense 7,120
Depreciation expense –delivery equipment 12,200
Depreciation expense – office equipment 9,600
Interest revenue 1,400
Utilities expense 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
Officers’ salaries 73,200
Sales 990,400

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 Sales returns & allowances 22,400
Sales discounts 1,760
Gain on sale of equipment 37,000
Inventory, January 1, 2018 179,400
Inventory, December 31, 2018 41,100
Purchases 346,000
Freight in 11,050
Accounts receivable 522,000
Extraordinary loss, before income taxes 145,200
Ordinary shares outstanding, 78,000 shares

Data for adjustment:

1. Cost of inventory in the possession of consignees as of December 31, 2018 was

not included in the ending inventory balance P 67,200

2. After aging the accounts receivable, a decision was made to increase the
allowance for doubtful accounts to a percentage of the ending accounts
receivable balance 3%

3. Sales commissions for the last day of the year have not been accrued.
Commissions average 3% of sales. Total sales on December 31 amounted to 27,200

4. No accrual was made for a freight bill received on January 3, 2019, for goods
received on December 29, 2018 1,500

5. An advertising campaign was initiated on November 1, 2018. The cost incurred

in November and December was debited to “Prepaid Advertising”. 4,200

6. Freight charges paid on sold merchandise and not passed on to the buyer were
netted against sales. Freight charges on sales during 2018 18,400

7. Depreciation expense on new sales equipment purchased March 1, 2018 was not
recognized. Equipment items are depreciated on a straight-line basis, residual
value being ignored.
Purchase price 15,600
Estimated economic life in years 10

8. The Extraordinary Loss represents loss from supplies and unsalable inventories
damaged by flood in august 145,200

9. Income tax rate on all items 30%

Required
1. Prepare adjusting journal entries at December 31, 2018.
2. Prepare an income statement for the year ended December 31, 2018, using the “function of
expense” method.
3. Prepare a statement of retained earnings for the year ended December 31, 2018.