Problem 1: T Company began operations on January 1, 2019.

The accounting records have

been maintained on a double-entry basis but the auditor noted that the cash basis of
accounting has been used by the company. The trial balance prepared from those records on
December 31, 2020, is as follows:
Cash 750,000
Sales 2,000,000
Purchases 1,000,00
0
Operating expenses 750,000
Printing equipment 100,000
Ordinary shares 1,000,000
Land 400,000
Building 750,000
Mortgage payable 450,000
Retained earnings 300,000
During the course of the audit, the following data were gathered:
 Accounts receivable on December 31, 2019, and December 31, 2020, were 100,000
and 250,000, respectively.

2019

A/R Under
Sales Under

A/R 100,000
Sales 100,000
(to correct understated sales in 2019, understated NI 2019)

2020

Sales Over
RE Under

Sales 100,000
Retained Earnings 100,000
(to correct overstated sales in 2020)

A/R Under
Sales Under

Accounts receivable 250,000

Sales 250,000
(to record uncollected sales in 2020)

 Included in sales of 2020 was 20,000 paid in advance by a customer for goods to be
delivered in 2021.

Sales Over
Unearned Under

2020
Sales 20,000
Unearned Revenue 20,000
(to correct overstated sales in 2020)

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 RE Under
Unearned Over

 Accrued expenses total 35,000 at year-end 2019 and 50,000 at year-end 2020.

Accrued Under
Expense Under

2019
Operating Expense 35,000
Accrued Expense 35,000
(to record accrued expenses in 2019)

2020

RE Over
Expense Under

Retained Earnings 35,000

Operating Expense 35,000

Accrued Under
Expense Under

Operating Expenses 50,000

Accrued expenses 50,000
(to record accrued expenses in 2020)

 Merchandise inventory amounted to 75,000 on December 31, 2019, and 110,000 on

December 31, 2020. The purchases include 50,000 cash advances to a supplier for
merchandise to be delivered in 2021.

2019

Inventory Under
COGS Over

Inventory 75,000
Cost of Goods Sold 75,000
(to record ending inventory in 2019)

2020

Cost of Goods Sold 75,000

Retained Earnings 75,000
(to record ending inventory in 2019)

Inventory 110,000
COGS 110,000
(to record ending inventory at 2020, overstated COGS)

Advances to supplier 50,000

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 Purchases 50,000
(to record advances at year-end, to correct overstated purchases)

 The printing equipment was acquired on September 1, 2019. The estimated life is 10
years with no residual value. Land and building were acquired on September 1, 2019,
and the building has an estimated useful life of 20 years.

2019

Expense Under
NI Over

Depreciation Expense-Eqt. 3,333

ACDEP-Equipment 3,333
(100,000 / 10 years’ x 4/12 = 3,333)
(to record unrecognized depreciation in 2019)

Depreciation Expense-Bldg. 12,500

ACDEP-Bldg. 12,500
(to record unrecognized depreciation in 2019)

2020

Retained Earnings 3,333

ACDEP-Equipment 3,333

Retained Earnings 12,500

ACDEP-Bldg. 12,500

Depreciation Expense 10,000

ACDEP- equipment 10,000
(to record depreciation in 2020)

Depreciation expense 37,500

ACDEP- BLDG 37,500
(to record depreciation in 2020)

 An analysis of the company’s receivables indicates that on December 31, 2020, 10%
of outstanding accounts may prove uncollectible.

Doubtful accounts 25,000

Allowance for doubtful accounts 25,000
(to record allowance for doubtful accounts in 2020)

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  The mortgage payable was related to the land and building acquired on September 1,
2019. Interest is at 12% per annum, payable semi-annually on September 1 and
March 1. The mortgage payable is payable in annual installments of 50,000 every
August 31. The first installment was paid on August 31, 2020. The interest paid
was charged to operating expenses.

2019

Sept - Dec 2019: 500,000 x 12% x 4/12 = 20,000

Interest Expense 20,000

Accrued Interest 20,000

2020

Retained Earnings 20,000

Interest Expense 20,000

Interest Expense 18,000

Accrued Interest 18,000

Requirements:
a. Correcting entries on December 31, 2020
b. Statement of comprehensive income for the year 2020-3 pts

INCOME STATEMENT:
Sales 2,130,000
Cost of goods sold (915,000)
Gross income 1,215,000
Expenses: 763,000
Depreciation-equipment 10,000
Depreciation-building 37,500
Doubtful accounts 25,000 (835,500)
Net income 379,500

c. Statement of financial position on December 31, 2020-3 pts

Balance sheet:
Current assets:
Cash 750,000
A/R 225,000
Advances to supplier 50,000
Inventory 110,000
Total current asset 1,135,000

Noncurrent asset:
Land 400,000
Building 750,000

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 Less ACDEP(12.5k+37.5k) (50,000) 700,000
Equipment 86,667
Total Noncurrent 1,186,667

Total Assets 2,321,667

Current Liability
Unearned Revenue 20,000
Accrued Expenses 68,000
Current portion of MP 50,000
Total CL 138,000

NCL:
Mortgage Payable 400,000

SHE:
OS 1,000,000
RE 783,667
Total; Liab and equity: 2,321,667

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