Chapter18 - Answer

7/24/2019 Chapter18 - Answer

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18-1. Salve Company

Requirement (1)

Salve Company

For the Year Ended December 31, 2006

Schedule 1: Cost of oods Sold

!nventory, 1"1"2006 # 3$,%00

#&rchases #1$3,000

'ransportat(on)(n 13,*00

Cost of p&rchases #1%6,*00+ess: #&rchases d(sco&nts taen #-,100

#&rchases ret&rns and allo.ances 6,200 /10,300

et p&rchases 1$6,200Cost of oods ava(lable for sale #21-,000

+ess: !nventory, 12"31"2006 /3-,100

Cost of oods sold #1$,00

Schedule 2: Sell(n E4penses

CHAPTER

18 PREPARATION OF AUDITEDFINANCIAL STATEMENTS


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18-2 Solutions Manual to Accompany Applied Auditing, 2006 dition

Schedule !: Deprec(at(on E4pense

&(ld(ns and off(ce e8&(pment # 1-,*00

Sales e8&(pment ,600'otal deprec(at(on e4pense # 2-,100

Requirement (2) Salve Company!ncome Statement


Sales #3-0,$00+ess: Sales d(sco&nts taen # -,00

Sales ret&rns and allo.ances 12,100 /1$,000

et sales #323,$00

Cost of oods sold /Sched&le 1 /1$,00

ross prof(t #1-3,%007perat(n e4penses

Sell(n e4penses /Sched&le 2 #-%,*00

eneral and adm(n(strat(ve e4penses /Sched&le 3 --,600Deprec(at(on e4pense /Sched&le - 2-,100

'otal operat(n e4penses /11$,200

7perat(n (ncome # 26,600

7ther (tems9ent reven&e # 6,00

!nterest e4pense /3,$00+oss on sale of off(ce e8&(pment /*,000

+oss from flood /12,000 /13,%00#reta4 (ncome from cont(n&(n operat(ons # 12,%00

! t /#$ --0 #3 600 /3 %-0


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'reparation o# Audited inancial Statements 18-3

ote: D&e to recently (ncreased obsolescence, the sales e8&(pment (s be(n

deprec(ated over a shorter &sef&l l(fe; 'he related #,600 deprec(at(on e4pense for

2006 (s #2,*00 more than the amo&nt that .o&ld have been reported &s(n the

or((nal &sef&l l(fe; 'h(s ca&sed a decrease (n 2006 (ncome from cont(n&(noperat(ons and net (ncome of #1,$*0 /after ta4es and a decrease (n earn(ns per

share of #0;22;

Requirement (3)Salve Company

Statement of 9eta(ned Earn(ns


9eta(ned earn(ns, 1"1"2006 #1%3,$00

+ess: #r(or per(od ad


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Schedule 2: Sell(n E4penses

Sales salar(es e4pense # 2$,-00Del(very e4penses 11,$00

Sales personnel travel e4penses %,300

Deprec(at(on e4pense: sales e8&(pment ,000

5dvert(s(n e4pense 1*,$00

'otal sell(n e4penses # $2,100

Schedule 3: eneral and 5dm(n(strat(ve E4penses

Deprec(at(on e4pense: b&(ld(ns and off(ce e8&(pment # 1-,-00

7ff(ce and adm(n(strat(ve salar(es 30,000

#roperty ta4es and (ns&rance e4pense ,000=(scellaneo&s adm(n(strat(ve e4pense 3,000

'otal eneral and adm(n(strat(ve e4penses # *6,-00

Requirement (2)=(ndanao =an&fact&r(n Company

!ncome Statement


Sales #-$2,100+ess: Sales ret&rns /*,000

et sales #-6$,100

Cost of oods sold /Sched&le 1 /23,100

ross prof(t #22%,0007perat(n e4penses

Sell(n e4penses /Sched&le 2 #$2,100

eneral and adm(n(strat(ve e4penses /Sched&le 3 *6,-00

'otal operat(n e4penses /12%,*00


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"omponents o# $ncome

arnings per %rdinary Share

(20,000 ordinary shares)

!ncome from cont(n&(n operat(ons #2;$19es&lts from d(scont(n&ed operat(ons 0;1

et (ncome #3;62

Requirement (3)

=(ndanao =an&fact&r(n Company

Statement of 9eta(ned Earn(ns


9eta(ned earn(ns, 1"1"2006 #1$,%00

+ess: #r(or per(od ad e8&(ty

#$3,3*0


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18-3.

1; !ncome statementA d(sclose as 7ther !tems; 5ltho&h the earth8&ae (s

&n&s&al (n nat&re (n th(s area and (t (s of (nfre8&ent occ&rrence, #5S 1 doesnot allo. presentat(on of e4traord(nary a(n or loss (n the !ncome Statement;

2; !ncome statementA d(sclose as 7ther !tems; Same rat(onale as (n /1;

3; !ncome statementA (ncl&de (n c&rrent deplet(on e4pense beca&se (t (s a chane

(n acco&nt(n est(mate; D(sclose effect of chane on net (ncome and earn(ns

per share (n a note;

-; !ncome statementA d(sclose as part of 7ther !tems; Same reason as (n /1;

*; !ncome statementA d(sclose as 7ther !tems; Same reason as (n /1;

6; !ncome statementA d(sclose as part of 7ther !tems; Same reason as (n /1;

$; 9eta(ned earn(ns statementA as a c&m&lat(ve effect on pr(or years> (ncome of

a chane (n acco&nt(n pr(nc(ple;

%; oteA d(sclos&re of the chane (n deprec(at(on method may be made;

; !ncome statementA d(sclose as part of 7ther !tems;

10; !ncome statementA d(sclose (n 9es&lts from D(scont(n&ed 7perat(ons; S(ncethe sement const(t&tes a ma


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18-4. Tigger Company

'(er CompanyComparat(ve Statements of !ncome

For the Year Ended December 31

2006 200*

Sales # 2,00,000 a # 3,00,000 b

Cost of oods sold /%0,000 c /2,310,000 d

ross prof(t # 1,20,000 # 1,*0,0007perat(n e4penses /$0,000 e /1,30,000 f

7perat(n (ncome # *0,000 # 200,000

7ther (tems:

+oss from obsolete (nventory /1*0,000

Cas&alty loss /60,000a(n on early ret(rement of bonds 2*0,000

=(scellaneo&s /*0,000 /0,000 h

#reta4 (ncome from cont(n&(noperat(ons # $*0,000 # 300,000

!ncome ta4 e4pense /30@ /22*,000 /0,000

!ncome from cont(n&o&s operat(ons # *2*,000 # 210,000

9es&lts from d(scont(n&ed operat(ons!ncome /loss from operat(ons of

d(scont(n&ed sement /net of#0,000 (ncome ta4 cred(t (n

2006 and #0,000 (ncome ta4es(n 200* /210,000 ( 210,000 E8&(ty #-,220,000

'otal +(ab(l(t(es and Shareholders> E8&(ty #6,$30,000

18-7. Blue Manufacturing Company

l&e =an&fact&r(n Company

alance SheetDecember 31, 2006


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'otal lon)term (nvestments 2-,100

#lant and E8&(pment+and #1$,000

&(ld(ns #2,*00

+ess: 5cc&m&lated deprec(at(on /32,-00 60,100

=ach(nery and e8&(pment #*$,%00+ess: 5cc&m&lated deprec(at(on /30,000 2$,%00

'otal property, plant and

e8&(pment 10-,00

!ntan(ble 5ssets#atents /net %,600

'otal 5ssets #21$,600

+iailities

C&rrent +(ab(l(t(esotes payable # -,00

5cco&nts payable 20,00

!nterest payable *00aes payable 2,$00

D(v(dends payable *,600

!ncome ta4es payable %,00

nearned rent *,000'otal c&rrent l(ab(l(t(es # -%,*00

+on)'erm +(ab(l(t(esonds payable /d&e 2020 #2%,000

+ess: D(sco&nt on bonds payable /2,*00 # 2*,*005ccr&ed pens(on cost 13,300

'otal lon)term l(ab(l(t(es 3% %00


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'otal Shareholders> E8&(ty #12$,*00

'otal +(ab(l(t(es and Shareholders> E8&(ty #21$,600

5dd(t(onal parenthet(cal or note d(sclos&res .h(ch m(ht be made (ncl&de:1; !nventory cost(n and val&at(on method/s for ra. mater(als, oods (n

process, and f(n(shed oods;

2; Gal&at(on method for maretable sec&r(t(es and (nvestment (n shares;

3; &mber of preference and common shares a&thor(ed and (ss&ed;-; #ens(on plan (nformat(on;

*; ond (ndent&re prov(s(ons, (ncl&d(n s(n(n f&nd (nformat(on;

or(n cap(tal ? C&rrent assets C&rrent l(ab(l(t(es

#31,*00 ? #%0,000 #-%,*00

C&rrent rat(o ? C&rrent assets C&rrent l(ab(l(t(es

1;6* ? #%0,000 #-%,*00

18-8. Nick Company(c Companyalance Sheet

December 31, 2006

Assets

C&rrent 5ssets

Cash # 3,%00'emporary (nvestments (n

ava(lable)for)sale sec&r(t(es -,600

5cco&nts rece(vable #1%,*00

+ess: 5llo.ance for do&btf&l acco&nts /$00 1$,%00!nventory 30,*00

#repa(d (ns&rance 2,00


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'rademars /net 3,$00

'otal (ntan(ble assets ,600

'otal 5ssets #166,200

+iailitiesC&rrent +(ab(l(t(es

5cco&nts payable # 1,-00

!ncome ta4es payable $,200

aes payable -,100C&rrent port(on of mortae payable -,000

'otal c&rrent l(ab(l(t(es # 3-,$00

+on)'erm +(ab(l(t(es

=ortae payable # 16,000onds payable /d&e 201$ #-0,000

5dd: #rem(&m on bonds payable -,300 --,300

'otal lon)term l(ab(l(t(es 60,300

'otal +(ab(l(t(es # *,000

Shareholders- quity

Contr(b&ted Cap(tal

#reference shares, #100 par # 6,0007rd(nary shares, #* par 11,000

#rem(&m on preference shares 2,-00

#rem(&m on ord(nary shares 1-,$00

'otal contr(b&ted cap(tal # 3-,1009eta(ned Earn(ns 3$,%00

5cc&m&lated 7ther Comprehens(ve!ncome

nreal(ed (ncrease (n val&e ofava(lable)for)sale sec&r(t(es 1,100

'otal contr(b&ted cap(tal reta(ned


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!nventor(es *60,000'otal c&rrent assets # 26,$00

+on)term !nvestment, at maret val&e -$,000 c, s note rece(vable 1 30,000 b

+and held for f&t&re b&(ld(n s(te 2*0,000 d 3%0,000'otal 5ssets #-,--,$00

+iailities and Shareholders- quity

C&rrent +(ab(l(t(es5cco&nts payable # 11,%00 e

C&rrent (nstallments of lon)term

debt 200,000 f,

+a.s&(t l(ab(l(ty %0,000

!ncome ta4es payable 21,200 h

Deferred ta4 l(ab(l(ty *,000'otal c&rrent l(ab(l(t(es # -26,000

+on)'erm Debt

=ortae payable # %00,000 f

ote payable -00 000


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'otal +(ab(l(t(es and Shareholders> E8&(ty #-,--,$00

1 5lternat(vely, th(s co&ld be reported &nder +on)'erm !nvestments

.planation o# Amounts

a Cash, per &na&d(ted balance sheet #22*,000

+ess: nrecorded checs (n payment of acco&nts

payable /1-,000SF chec not recorded /2,000

Cash restr(cted for b&(ld(n p&rposes

/reported (n other assets /100,000Corrected balance #10,000

b 5cco&nts rece(vable /net, per &na&d(ted balance sheet #3-*,$005dd chare)bac for SF chec Hsee /aI 2,000

+ess: 7ff(cer>s note rece(vable /reported (n other

assets /30,000

Corrected balance #31$,$00

c !nvestments, per &na&d(ted balance sheet # *$,$00

+ess: +on)term (nvestment Hreported separately,

see /


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< +on)term (nvestment, at cost Hsee /cI # *1,300

+ess: nreal(ed decrease (n val&e /-,300

+on)term (nvestment, at maret val&e # -$,000

18-10. Kiko Company

J(o Company

alance SheetDecember 31, 2006

Assets

C&rrent 5ssets

Cash # 2,00 a

5cco&nts rece(vable /net *,000 b

!nventory -,200 c

'otal c&rrent assets

#12,1

00#roperty, #lant and E8&(pment

+and # 6,%00 d

&(ld(ns and e8&(pment # %2,%00 e

+ess: 5cc&m&lated deprec(at(on /16,000 f 66,%00'otal property, plant and

e8&(pment $3,600

'otal 5ssets

#%*,$

00

+iailities

C&rrent +(ab(l(t(es


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'otal +(ab(l(t(es and Shareholders> E8&(ty #%*,$00

a +ast (tem on statement of cash flo.sb #*,000 ? #3,00 B #1,100c #-,200 ? #-,$00 #*00d #6,%00 ? #,%00 #3,000 sold

e #%2,%00 ? #6%,00 B #13,00 p&rchasedf #16,000 ? #1-,100 B #1,00 ann&al deprec(at(on #3,000 ? #-,000 #1,000h #1,*00 ? #1,100 B #-00( #300 ? #6,000 face val&e #*,$00 (ss&e pr(ce

< #16,*00 ? #13,*00 B #3,000 (ss&ed #12,$00 ? #11,200 B #1,*00 (n e4cessl

#-6,300 ? #--,-00 B #*,000 net (ncome #3,100 d(v(dends

18-11. Lifer Company

+(fer Company

alance Sheet

December 31, 2006

Assets

C&rrent 5ssetsCash # 1,2005cco&nts rece(vable -,000

!nventor(es 10,%0

#repa(d (tems 1 -20


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'otal c&rrent l(ab(l(t(es # 10,$0

+on)'erm +(ab(l(t(es

10@ bonds payable #1*,000

+ess: D(sco&nt on bonds payable /00 #1-,100=ortae payable 20,000

'otal lon)term l(ab(l(t(es 3-,100

'otal +(ab(l(t(es # --,%0

Shareholders- quity

#reference shares, #100 par # 21,000

#rem(&m on preference shares 2,300 #23,3007rd(nary shares, #10 par #1$,*00

#rem(&m on ord(nary shares 1-,300 31,%00

9eta(ned Earn(ns 2*,200

'otal Shareholders> E8&(ty %0,300

'otal +(ab(l(t(es and Shareholders> E8&(ty #12*,10

Supporting calculations (#or /alance Sheet)

Account

/alance

1106 "alculations

/alance

123106

Cash # 1,00 Decreased /#$00 from 1"1"06 # 1,200

5cco&nts

rece(vable *,100 Decreased /#1,100 from 1"1"06 -,000

!nventor(es 13,00 Decreased /#3,010 from 1"106 10,%0

#repa(d (tems 1,300 !ncreased #120 from 1"1"06 1,-20


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#roceeds from sale *00 Dr

9ed&ct(on (n acc&m&lated

deprec(at(on # 1,*%0 Dr

C&rrent deprec(at(on /*,100 Cr!ncrease (n acc&m&lated

deprec(at(on #/3,*20 Cr /32,*20

#atents /net $,100 5mo&nt rece(ved for

patent #/2,100+ess: a(n on sale 1,100

Carry(n val&e sold #/1,000

5dd: #atents amort(ed /600 et decrease #/1,600 *,*00

5cco&nts payable *,*00 Decreased #/-00 from 1"1"06 *,100

!ncome ta4espayable -,100 !ncreased #10 from 1"1"06 -,20

=(sc; payables 1,200 !ncreased #200 from 1"1"06 1,-00

10@ bonds payable 1*,000 o chane 1*,000

D(sco&nt on bonds

payable /1,000 5mort(at(on #100 /00

=ortae payable 0 !nc&rred (n p&rchase of b&(ld(n,

#20,000 20,000

#reference shares 1$,000 !ss&ed -0 shares for land

-0 4 #100 par ? #-,000 21,000


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'otal (ncrease:

#1,*00 B #1,600 ? #3,100 1-,300

9eta(ned earn(ns 23,%00 5dd: et (ncome #10,000

+ess: Cash d(v(dend /*,000+ess: Share d(v(dend /3,600

!ncrease (n reta(ned earn(ns # 1,-00 2*,200


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18-12. Harry Company

Requirement (1)

arry Company

orsheet for Statement of Cash Flo.s

For Year Ended December 31, 2006

12/3/1/05 Post-ClosingTrial Balance

12/31/06 AdjustedTrial Balance Change Worksheet ntries

Accounts !e"it Credit !e"it Credit !e"it Credit !e"it Credit

Ca)7 2, 3,3 ! ")% !&cco$nt) receiab'e ,3 !,2 1,1 "i% 1,1Inentory .,1 -,- 1,. ":% 1,.

Ine)tment in bond) 1, 1.,! .,! "n% .,!Property and e#$ipment 1,3 133,3 2., "o% 2.,&cc$m$'ated depreciation /2,/ /-,2 !,. "7% !,.&cco$nt) payab'e .,1 ., / "k% /Sa'arie) payab'e 1,3 ! "'% !Intere)t payab'e 3 3 "m% 3;ote) payab'e -, -, "p% -,(rdinary )7are), no par /3,! .,1 1/, "r% 1/,Retained earning) 3., 31, !, "#% !,

Sa'e) .-, .-, "a% .-,Co)t of good) )o'd /.,. /.,. "c% /.,.Depreciation e0pen)e !,. !,. "7% !,.

Sa'arie) e0pen)e 12, 12, "d% 12,(t7er operating e0pen)e) 1, 1, "f% 1,Intere)t reen$e 1,2 1,2 "b% 1,2Intere)t e0pen)e - - "e% -Income ta0 e0pen)e

!,

!,

"g% !,


23/28


*ota') 133,/ 133,/ 2/, 2/, 122,3 122,3 122,3 122,3

(orsheet continued on ne.t page)

18-12. Harry Company (continued !

Requirement (1) continued 4 4 4 4 4

Worksheet ntries

!e"it Credit

Ca)7 F'o


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*ota') 11, 11,


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18-12. Harry Company (continued !

Requirement (2)

arry Company

Statement of Cash Flo.s

For Year Ended December 31, 2006

Cash Flo.s From 7perat(n 5ct(v(t(es

Cash !nflo.s:

Collect(ons from c&stomers # 0,100

!nterest collected 1,200Cash (nflo.s from operat(n act(v(t(es # 1,300

Cash 7&tflo.s:

#ayments to s&ppl(ers #/*0,200

#ayments to employees /12,600#ayments of (nterest /600

7ther operat(n payments /1,$00

#ayments of (ncome ta4es /6,000Cash o&tflo.s from operat(n act(v(t(es /$1,100

et cash prov(ded by operat(n act(v(t(es # 20,200

Cash Flo.s From !nvest(n 5ct(v(t(es

#ayment for p&rchase of (nvestments # /%,600

#ayment for p&rchase of b&(ld(n /2%,000

et cash &sed for (nvest(n act(v(t(es /36,600

Cash Flo.s From F(nanc(n 5ct(v(t(es

#roceeds from (ss&ance of note payable # ,000

#roceeds from (ss&ance of ord(nary shares 1- *00


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27/28


18-14. Circle CompanyC!9C+E C7=#5Y

Sched&le to 5nalye Effects of Errors

!ncome 200* !ncome 2006 !ncome 200$

alance Sheet

Dec; 31, 200$

5mo&nt

E4planat(on Deb(t Cred(t Deb(t Cred(t Deb(t Cred(t Deb(t Cred(t 5cco&nt

1; Sales ta4 accr&al om(tted:

December 31, 200*

December 31, 2006

December 31, 200$

2,000a

*,000

2,000

,000

*,000

,000 Sales ta4es payable

2; 5cco&nts payable and (nventory om(tted: o correct(on beca&se errors offset each other3;

-;

*;

6;

$;

%;

!nventory recorded t.(ce

ad debtsb

ond prem(&m

'ravel advances

Salary accr&al

Cost m(sclass(f(cat(on

*,000

10,000

*,000c 2*,000

-,000

1,000

11,000

*,000

1,200

1%,000

10,000

2,200

1%,000

$,000

*,000

-,000

1,200

11,000

12,000

%,200

,600

$,000

1*,000

5llo.ance for do&btf&l

acco&nts

5dd(t(onal pa(d)(n

cap(tal, ond prem(&m

Salar(es payable

5cc&m&lated deprec(at(on

a 'he correct sales ta4 e4pense for 200* (s #12,000 /#200,000 4 6@; S(nce #10,000 .as recorded (n 200*, the correct(n amo&nt (s

#2,000; o.ever, th(s #2,000 .o&ld have been recorded by the company (n 2006, so the total recorded sales ta4 e4pense of

#1*,000 (ncl&des only #13,000 for sales made (n 2006; 'herefore the correct balance of #1%,000 /#300,000 4 6@ (s obta(ned by acorrect(n amo&nt of #*,000; S(m(larly, (n 200$ the #*,000 .o&ld have been recorded by the company, so the total recorded sales

ta4 e4pense of #26,000 (ncl&des only #21,000 for sales made (n 200-; 'herefore the correct balance of #30,000 /#*00,000 4 6@

(s obta(ned by a correct(n amo&nt of #,000;b S(nce bad debts .ere .r(tten off each year d(rectly to bad debts e4pense, the (ncrease (n the 5llo.ance for Do&btf&l 5cco&nts

balance each year represents the add(t(onal bad debts e4pense;


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18-28 Solutions Manual to Accompany Applied Auditing, 2006 ditionc 'he res(d&al val&e (s (nored beca&se (t .o&ld have been (ncl&ded (n the comp&tat(on of the deprec(at(on on the mach(ne;

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Chapter18 - Answer

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