Solution manual applied auditing by cabrera chapter16 answer
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CHAPTER
16
16-1.
a
16-2.
d
16-3.
SUBSTANTIVE TESTS OF
INCOME STATEMENT ACCOUNTS
Red Company
Requirement (1)
Reported net income
Subtract ending inventory overstatement
Add beginning inventory overstatement
Subtract wages payable when incurred
Add wages payable when expensed
Subtract bad debts
Add back prepayments in year recorded as
expense
Subtract prepayments in year expense is incurred
Correct net income
2006
2005
P 35,000
P 27,000
(2,000)
5,000
(800)
700
(400)*
200
(5,000)
(700)
(1,300)
500
(500)
P 37,200
P 20,500
* P1,700 – P1,300
Requirement (2)
2007
Jan. 1
Retained Earnings
Insurance Expense
Inventory
Wages Expense
Allowance for Doubtful Accounts
4,300
200
2,000
800
1,700
16-2
Solutions Manual to Accompany Applied Auditing, 2006 Edition
16-4.
Orange Corporation
Requirement (1)
(1)
(2)
(3)
(4)
Allowance for Uncollectible Accounts
Administrative Expenses (37,000 – 19,600)
To reflect reduction in loss experience
rate.
Unrealized Holding Loss on Trading Marketable
Securities
Valuation Allowance
Retained Earnings
To reduce marketable securities to
market valuation and correct prior
year’s profit.
Retained Earnings
Cost of Sales
Merchandise Inventory
To adjust for overstatements in opening
and closing inventories.
a.
b.
(5)
(6)
17,400
17,400
19,000
16,000
3,000
4,000
2,100
6,100
Equipment
Operating Expenses
Retained Earnings
Accumulated Depreciation: Equipment
To adjust for error in recording of
equipment purchase in 2005 and
related depreciation for 2005 and
2006.
12,000
1,100
Accumulated Depreciation: Equipment
Equipment
Other Income
To adjust for misposting of
equipment sale.
17,500
Prepaid Expenses
Operating Expenses
Retained Earnings
To adjust for nonrecognition of prepaid
expense in 2005 and 2006.
Ordinary Shares
Capital in Excess of Par
To adjust for capital contributed in
excess of par value.
10,900
2,200
15,000
2,500
900
900
1,800
60,000
60,000
Substantive Tests of Income Statement Accounts
16-3
Requirement (2)
Orange Corporation
Computation of Corrected Net Income
For Years Ended December 31, 2006 and 2005
Reported income
Change in accounts receivable loss
experience rate
Unrealized loss (gain) on marketable securities
Ending merchandise inventories overstated:
December 31, 2005
December 31, 2006
Misposting of equipment purchase:
Decrease in operating expenses – 2005
Increase in operating expenses – 2006
Misposting of proceeds of equipment sold
Recognition of prepaid insurance
Corrected net income
2006
Debit
(Credit)
2005
Debit
(Credit)
P(220,000)
P(195,000)
(17,400)
19,000
--(3,000)
(4,000)
6,100
4,000
(10,900)
1,100
(2,500)
900
(1,800)
P(216,800)
P(206,700)
16-4
Solutions Manual to Accompany Applied Auditing, 2006 Edition
16-5.
XOR Corporation
XOR Corporation
Worksheet to Correct Net Profit and Balance Sheet Accounts
From 2004 to 2006
Net Profit
Unadjusted balance
Add (Deduct) Adjustments
(1) Overvaluation of inventory
2004
2005
(2) Undervaluation of inventory
2003
2006
(3) Prepaid expenses omitted at
end of year
2003
2004
2005
2006
(4) Prepaid income omitted at
end of year
2004
2006
(5) Accrued expenses omitted at
end of year
2003
2004
2005
2006
(6) Accrued income omitted at
end of year
2004
2006
Adjusted amount
2004
2005
2006
Inventory
Retained
Earnings
P 7,500
P 6,500
P 5,500
P25,000
P27,000
(7,000)
7,000
(8,000)
8,000
9,000
9,000
Adjustments to Balance Sheet Accounts
Prepaid
Prepaid
Accrued
Expenses
Income
Expenses
Accrued
Income
(6,000)
9,000
(900)
700
(400)
200
( 75)
125
P(5,850)
(700)
500
(500)
600
600
(300)
(300)
100
( 50)
( 50)
600
400
75
(100)
300
50
(125)
P 5,550
150
P22,500
P34,000
150
P36,400
P 600
P 300
P
50
150
P 150
Substantive Tests of Income Statement Accounts
16-6.
Sun Freight Company
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
a
c
c
a
a
c
a
d
a
a
P107,700
P376,800
P159,000
P320,550
P25,000
P125,000
P68,600
P179,650
P703,250
P144,250
(P112,500 – P4,800)
(P204,000 – P45,000)
(P9,500 + P25,000 + P16,250 + P18,250 + P75,250)
16-5
