ASSIGNMENTS
ASSIGNMENTS
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
2. A physical inventory taken on December 31, 2018 revealed goods costing 600,000.
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
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.
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.
SOLUTION:
Furniture and Equipment 312,000
Miscellaneous Equipment 90,000
= 38,200
2018 Depreciation:
TOTAL 39,200
7. Prepaid expenses include 4,800 insurance premium on a one-year insurance policy taken on
October 1, 2018.
SOLUTION:
4,800/12 = 400
0ctober – December = 3 months
400x3 = 1,200
8. Unearned rent income on December 31, 2018 amounted to 10,000.
SOLUTION:
12,800 – 10,000 = 2,800
9. Accrued expenses on December 31, 2018 amounted to 54,000.
SOLUTION:
54,000-51,000 = 3,000 increase
REQUIRED:
OTHER INSTRUCTIONS:
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
DEBIT CREDIT
Retained Earnings 80,000
Wages Expense 80,000
Selected account balances (before adjustments) taken form the books of Flawless, In. for the year ended
December 31, 2018 are as follows:
1. Cost of inventory in the possession of consignees as of December 31, 2018 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% 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.
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.
6. Freight charges of 18,400 paid on sold merchandise and not passed to the buyers were netted
against sales.
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.
8. The Extraordinary Loss represents loss from supplies lost and unsalable inventories heavily
damaged by flood in August.
REQUIRED:
Flawless, Inc.
Statement of Comprehensive Income
For the year Ended December 31, 2018
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
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
Flawless, Inc.
Statement of Changes in Retained Earnings
For the Year Ended December 31,2018