BIWEEKLY 1.

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 Expenses 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.

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.
 4. The allowance for doubtful accounts should be adjusted to 5% of accounts
receivable.
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 were acquired at the inception of the company three years ago.
Depreciation for 2018 has not been recorded.
7. Prepaid expenses include 4,800 insurance premium on a one-year insurance
policy taken on October 1, 2018.
8. Unearned rent income on December 31, 2018 amounted to 10,000.
9. Accrued expenses on December 31, 2018 amounted to 54,000.
10. Tax rate 30%

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)

Trial Balance Adjustments Profit or Loss Financial Position

Account Titles Debit Credit Debit Credit Debit Credit Debit Credit
Cash 191,000 60,000 131,000
Accounts receivable 615,000 615,000
Allowance for doubtful
21,000 9,750 30,750
accounts
Inventory, December 31,
584,000 584,000
2017
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 182,800 182,800
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 Expenses 400,000 400,000
Advertising Expense 124,000 124,000
Commission Expense 80,000 80,000
Utilities Expense 32,000 32,000
Supplies 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
Inventory, Dec. 31, 2012 650,000 650,000
Cost of goods sold 2,408,000 2,408,000
Treasury shares 30,000 30,000
Depreciation expense 39,200 39,200
Insurance expense 1,200 1,200
3,253,950 3,253,950 3,162,150 3,550,800
Profit before income tax 388,650
3,550,800 3,550,800
Profit before income tax 388,650
Income tax expense 116,595
Income tax payable 116,595
Profit 272,055 272,055
388,650 388,650 1,974,800 1,974,800

BIWEEKLY 1.2
An audit working paper may be prepared to correct several misstatements in the
financial statements. An example of a format of a working paper is presented below
(The year under audit is 2018):

Nature of Under (over)statement in

Retained Earnings 2018 Accounts Affected
error Profit of
Before 2017 2017 01/01/18 Account Debit Credit

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 adjustment 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 Under (over)statement in

Retained Earnings 2018 Accounts Affected
error Profit of
Before 2017 2017 01/01/18 Account Debit Credit
Omission of
accrued Wages
(80,000) (80,000) 80,000
wages Expense
12/31/2017

Journal Entries:

Debit Credit
Retained Earrings 80,000
          Wages Expense 80,000

MONTHLY LONG EXERCISES 1

Selected account balances (before adjustments) taken form the books of Flawless, Inc.
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 145,200
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.
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. 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.
4. No accrual had been made for a freight bill received on January 5, 2018, for
goods received on December 29, 2018, 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.
9. Income tax rate is 30%

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 earning for the year ended December 31, 2018.