ASSIGNMENT 1.

Below is the trial balance as of December 31, 2018 of Clarity Company as prepared by its accountant.

DEBIT CREDIT
Cash 191,000
Accounts Receivable 615,000
Allowance for doubtful accounts 21,000
Inventory, December 31, 2017 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 12,000
Transportation Expense 14,000
Repairs and Maintenance 16,000
Miscellaneous Expenses 23,000
5,035,000 5,035,000

You have gathered the following information for adjustments:

1. The Cash account included equipment acquisition fund amounting to 60,000.

Equipment Acquisition Fund 60,000

Cash 60,000

2. A physical inventory taken on December 31, 2018 revealed goods costing 600,000.

Inventory, End 600,000

Cost of Goods Sold 2,458,000
Purchases 2,474,000
Inventory, Beginning 584,000
SOLUTION:
Beg. Inv. 584,000
Purchases 2,424,000
50,000 2,474,000
3,058,000
End. Inv. (600,000)
COGS 2,458,000

3. Goods purchased under FOB shipping point and verified to have been shipped by the supplier on
December 28, 2018 were received and recorded by Clarity on January 4, 2019, 50,000.

Purchases 50,000

Accounts Payable 50,000

4. The allowance for doubtful accounts should be adjusted to 5% of accounts receivable.

Doubtful accounts expense 9,750

Allowance for doubtful accounts 9,750

SOLUTION:
615,000 (A/R) x 5% = 30,750
Recorded Allowance (21,00)
9,750

5. The company purchased 100 shares of its 100 par value ordinary share capital for 30, 000, the
amount having been charged to the Investment account.

Treasury Shares 30,000

Investments 30,000

6. Except for equipment purchased on June 30, 2018 for 20,000 cash, all equipment was acquired
at the inception of the company three years ago. Depreciation for 2018 has not been recorded.

Depreciation Expense 39,200

Accumulated Depreciation 39,200

SOLUTION:
Furniture and Equipment 312,000
Miscellaneous Equipment 90,000

Total furniture and equipment 402,000

Acquired June 30, 2018 20,000

Acquired at inception 382,000

Annual Depreciation = 76,400/2

= 38,200

Annual Depreciation rate = 38,200/382,000 = 10%

2018 Depreciation:

On beginning balance 38,200

On new (10% x 20,000 x 6/12) 1,000

TOTAL 39,200

7. Prepaid expenses include 4,800 insurance premium on a one-year insurance policy taken on
October 1, 2018.

Insurance Expense 1,200

Prepaid Expenses 1,200

SOLUTION:
4,800/12 = 400
0ctober – December = 3 months

400x3 = 1,200
 8. Unearned rent income on December 31, 2018 amounted to 10,000.

Unearned Rent Income 2,800

Rent Income 2,800

SOLUTION:
12,800 – 10,000 = 2,800
9. Accrued expenses on December 31, 2018 amounted to 54,000.

Miscellaneous Expenses 3,000

Accrued Expenses 3,000

SOLUTION:
54,000-51,000 = 3,000 increase

10. Tax rate 30%.

Income Tax Expense 101,595

Income Tax Payable 237,055

Profit Before Income Tax 338,650

REQUIRED:

A. Prepare audit adjusting entries.

B. Prepare a working trial balance to facilitate the preparation of the financial statements for the
year ended December 31, 2018.

OTHER INSTRUCTIONS:

 Write your answers as replies below.

 Explore and Utilize canvas features in writing your answers. Use the TABLE function. (Same
format below for requirement B)
 CLARITY COMPANY

WORKING TRIAL BALANCE

FOR THE YEAR ENDED DECEMBER 31, 2018

Account Titles Trial Balance Adjustments Profit or Loss Financial Position

Debit Credit Debit Credit Debit Credit Debit Credit
Cash 191,000 60,000 131,000
A/R 615,000 615,000
Allowance for doubtful accounts 21,000 9,750 30,750
Inv. – Dec, 31, 2017 584,000 584,000
Prepaid Expenses 8,000 1,200 6,800
Investments 110,000 30,000 80,000
Furniture and equipment 312,000 312,000
Miscellaneous Equipment 90,000 90,000
Accumulated Depreciation 76,400 39,200 115,600
Accounts Payable 543,000 50,000 593,000
Accrued Expenses 51,000 3,000 54,000
Unearned rent income 12,800 2,800 10,000
Ordinary share capital 600,000 600,000
Retained Earnings 182,000 182,000
Sales 3,500,000 3,500,000
Rent Income 48,000 2,800 50,800
Purchases 2,424,000 50,000 2,474,000
Salaries Expense 400,000 400,000
Advertising expense 124,000 124,000
Commission Expense 80,000 80,000
Utilities Expense 32,000 32,000
Supplies Expense 12,000 12,000
Transportation Expense 14,000 14,000
Repairs and maintenance 16,000 16,000
Miscellaneous Expenses 23,000 3,000 26,000
5,035,000 5,035,000
Equipment acquisition fund 60,000 60,000
Doubtful accounts expense 9,750 9,750
Inv. – December, 31, 2018 600,000 600,000
COGS 2,458,000 2,458,000
Treasury Shares 30,000 30,000
Depreciation Expense 39,200 39,200
Insurance Expense 1,200 1,200
3,253,950 3,253,950 3,212,150 3,550,800
Profit Before Income Tax 338,650
3,550,800 3,550,800
Profit Before Income Tax 338,650
Income Tax Expense 101,595
Income Tax Payable 101,595
Profit 237,055 237,055
338,650 338,650 1,924,000 1,924,000
ASSIGNMENT 1.2

An audit working paper may be prepared to correct several misstatements in the financial statements.

To illustrate the use of the working paper, assume that the following errors were discovered when
auditing the financial statements for the year 2018.

A. The company failed to accrue wages of 80,000 at December 31,2017. The wages were recorded
as expense when paid in 2018.
B. Accrued interest income of 48,000 at December 31, 2017 was recorded only when collected in
2018.
C. An insurance premium for 36,000 covering three years – 2017, 2018 and 2018 was paid in 2017
and was charged to insurance expense. No adjustments were made at December 31, 2017 and
2018.
D. Research and development costs of 120,000 were incurred early in 2016. They were erroneously
capitalized and were amortized over a three-year period. Amortization was recorded by a charge
to Research and Development Expense and a credit to Accumulated Amortization account. At
December 31, 2018, both the asset account and the related accumulated amortization were
brought to zero balances.
E. A capital expenditure of 1,500,000 for office equipment with useful life of 5 years was
erroneously charged to maintenance expense at December 31, 2017.

REQUIRED:

Analyze the effects of such errors and their corrections then make the necessary adjusting entries to
restate the 2018 financial statements. Make a working paper to correct the several misstatements.

The first adjusting entry is done for you as well as for the Audit Working Paper.
 AUDIT WORKING PAPER

Nature of Error Under(over)statement in Retained 2018 Accounts Affected

Profit of Earnings
Before 2017 2017 01/01/18 Account Debit Credit
Omission of accrued
wages

12/31/2017 (80,000) (80,000) Wages Expense 80,000

Omission of accrued
Interest Income
12/31/2017 48,000 48,000 Interest Income 48,000
Omission of accrued
insurance expense
12/31/2017 24,000 24,000 Insurance 12,000
Expense
Omission of accrued Prepaid 12,000
expenses Insurance
12/31/2016 120,000 (120,000) Capitalized
Research and
Development 120,000
Cost

12/31/2017 80,000 (80,000) Accumulated

Amortization –
Research and 80,000
Development
Cost
40,000
Amortization
Expense –
Research and
Development
Cost
Misstatement of
Expenses
12/31/2017 1,500,000 900,000 Office 1,500,000
Equipment
Depreciation 300,000
Expense -
Equipment
Accumulated 900,000
Depreciation
Net 120,000 1,452,000 812,000
under(over)statement
 JOURNAL ENTRIES:

DEBIT CREDIT
Retained Earnings 80,000
Wages Expense 80,000

Interest Income 48,000

Retained Earnings 48,000

Insurance Expense 12,000

Prepaid Insurance 12,000
Retained Earnings 24,000

Retained Earnings 80,000

Accumulated Amortization – Research and Development Cost 80,000
Capitalized Research and Development Cost 120,000
Amortization Expense – Research and Development Cost 40,000

Office Equipment 1,500,000

Depreciation Expense - Equipment 300,000
Accumulated Depreciation 900,000
Retained Earnings 900,000
MONTHLY ASSIGNMENT (JANUARY)

Selected account balances (before adjustments) taken form the books of Flawless, In. for the year ended
December 31, 2018 are as follows:

Retained Earnings, January 1, 2018 881,340

Sales Salaries and Commissions 70,000
Advertising Expenses 32,180
Legal Services 4,450
Insurance and Licenses 17,000
Salesmen’s Travelling 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 (credit balance) 740
Officer’s Salaries 73,200
Sales 990,400
Sales Returns and Allowance 22,400
Sales Discount 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 tax 145,000
Ordinary Share Capital 78,000

Date for adjustment:

1. Cost of inventory in the possession of consignees as of December 31, 2018 was not included in
the ending inventory balance, 67,200.

Inventory, December 31, 2018 67,200

Income Summary 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.

Doubtful account expense 14,920

Allowance for doubtful accounts 14,920

3% x 522,000 = 15,660
15,660 – 740 = 14,920

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.

Sales salaries and commission 816

Accrued Expenses 816

3% x 27,200 = 816
 4. No accrual had been made for a freight bill received on January 5, 2018, for goods received on
December 29, 2018, 1,500.

Freight in 1,500
Accounts Payable 1,500

5. An advertising campaign was initiated November 1, 2018. The cost of 4,200 incurred in
November and December was debited to prepaid advertising.

Advertising expense 4,200

Prepaid Advertising 4,200

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

Freight out 18,400

Sales 18,400

7. Depreciation on a new equipment purchased on March 1, 2018 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.

Depreciation Expense – Office equipment 1,300

Accumulated Depreciation 1,300

15,600/10 x 10/12 = 1,300

8. The Extraordinary Loss represents loss from supplies lost and unsalable inventories heavily
damaged by flood in August.

Other operating expenses – Loss from flood 145,000

Extraordinary Loss 145,000

9. Income tax rate is 30%.

Income Tax Expense 50,374

Income Tax Payable 50,374

REQUIRED:

A. Prepare adjusting entries.

B. Prepare a statement of comprehensive income following the function of expense method.
C. Prepare a statement of comprehensive income following the nature of expense method.
D. Prepare a statement of retained earnings for the year ended December 31,2018.
FUNCTION OF EXPENSE METHOD

Flawless, Inc.
Statement of Comprehensive Income
For the year Ended December 31, 2018

Net Sales 984,640

Cost of goods sold 429,650
Gross Profit 554,990
Other Operating Income 52,700
Total Income 607,690
Operating Expenses
Selling Expenses 130,916
General and administrative expenses 154,620
Other operating expenses 145,200
Total operating expenses 430,736
Profit before interest and income tax 176,954
Interest expense (9,040)
Profit before income tax 167,914
Income Tax Expense (30% x 167,914) (50,374)
PROFIT 117,540

SOLUTIONS:

NET SALES
Sales (990,400 + 18,400) 1,008,800
Sales returns and allowances (22,400)
Sales discounts (1,760)
Net Sales 984,640

COST OF GOODS SOLD

Inventory, January 1, 2018 179,400

Net cost of purchases:

Purchases 346,000
Freight in 12,550 358,550
Total goods available for sale 537,950
Less: Inventory, December 31,2018 (108,300)
COGS 4 29,650

OTHER OPERATING INCOME

Interest Revenue 1,400
Dividend Revenue 14,300
Gain on sale of equipment 37,000
Total other operating income 52,700

SELLIING EXPENSES
Sales Salaries and Commissions 70,816
Advertising expense 36,380
Salesmen’s travelling expenses 7,120
Depreciation expense – delivery equipment 12,200
Miscellaneous Selling 4,400
Total selling expenses 130,916
GENERAL AND ADMINISTRATIVE EXPENSES
Legal Services 4,450
Insurance and Licenses 17,000
Depreciation Expense – office equipment 10,900
Utilities Expense 12,800
Telephone and postage 2,950
Officer’s salaries 73,200
Doubtful accounts expense 14,920
Freight out 18,400
Total 154,620
NATURE OF EXPENSE METHOD

Flawless, Inc.
Statement of Comprehensive Income
For the year Ended December 31, 2018

Net Sales 984,640

Other Income 52,700
Total Income 1,037,340
Expenses
Purchases 346,000
Freight in 12,550
Decrease in inventory 71,100
Sales Salaries and Commission 70,816
Advertising Expense 36,380
Legal Service 4,450
Insurance and Licenses 17,000
Salesmen’s Travelling Expense 7,120
Depreciation Expense – Delivery equipment 12,200
Depreciation Expense – Office equipment 10,900
Utilities 12,800
Telephone and postage 2,950

Officers’ Salaries 73,200

Doubtful Accounts Expense 14,920

Freight out 18,400
Miscellaneous Expense 4,400
Loss from flood 145,200 860,346
Income before interest and income tax 176,954
Interest Expense (9,040)
Income before income tax 167,914
Income tax expense 50,374
NET INCOME 117,540
STATEMENT OF RETAINED EARNINGS

Flawless, Inc.
Statement of Changes in Retained Earnings
For the Year Ended December 31,2018

Retained Earnings, January 1, 2018 881,34O

Add: Net Income 117,540
998,880
Less: Dividends declared 66,000
Retained Earnings, December 31, 2018 932,880