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The partnership of King, Queen and Prince engaged you to audit its accounting records. Some accounts are on the accrual basis and others are on the cash basis. The partnership's books were closed at December 31, 2007 by the bookkeeper who prepared the general ledger trial balance that appears below. King, Queen and Prince GENERAL LEDGER TRIAL BALANCE December 31, 2007 Debit Credit Cash P 100,000 Accounts receivable 400,000 Inventory 260,000 Land 90,000 Buildings 500,000 Accumulated depreciation-buildings P 20,000 Equipment 560,000 Accumulated depreciation-equipment 60,000 Goodwill 50,000 Accounts payable 550,000 Allowance for future inventory losses 30,000 King, capital 600,000 Queen, capital 400,000 Prince, capital 300.000 Totals P1.960,000 P1.960.000 Your inquiries disclosed the following: 1. The partnership was organized on January 1, 2006 with the partners making equal amount of contributions. The initial partnership agreement calls for an equal distribution of profit or loss among the partners. The partnership agreement was amended effective January 1, 2007 to provide for the following profit and loss ratio: King, 50%, Queen, 30%, and Prince, 20%. The amended partnership agreement also stated that the accounting records were to be maintained on the accrual basis and that any adjustments necessary for 2006 should be allocated according to the 2006 distribution of profits. 2. The following amounts were not recorded: December 31 2007 December 31 2006 Prepaid insurance P7,000 P6,500 Advances from customers 2,000 11,000 Accrued interest expense 4,500 The advances from customers were recorded as sales in the year the cash was received. 3. In 2007 the Partnership recorded a provision of P30,000 for anticipated declines in inventory prices. You convinced the partners that the provision was unnecessary and should be removed from the books. 4. The partnership charged equipment purchased for P44.000 on January 3, 2007 to expense. This equipment has an estimated life of ten years and an estimated salvage value of P4.000. The partnership depreciates its capitalized equipment under the straight-line depreciation method. 5. The partners agreed to establish an allowance for doubtful accounts at two percent of current accounts receivable and five percent of past due accounts. At December 31, 2006 the partnership had P540.000 of accounts receivable, of which only P40,000 was past due. At December 31, 2007 fifteen percent of accounts receivable was past due, of which P40.000 represented sales made in 2006, and was generally considered collectible. The partnership had written off uncollectible accounts in the year the accounts became worthless as follows: Accounts Written Off in 2007 2006 2007 accounts P 8,000 2006 accounts 10,000 2,500 6. Goodwill was recorded on the books in 2007 and credited to the partners' capital accounts in the profit and loss ratio in recognition of an increase in the value of the business resulting from improved sales volume. 7. No other capital transactions took place in 2006 and 2007. 8. Ignore tax implications d. P920,000 Based on the above information, answer the following: 1. The net income of the partnership in 2007, before adjustment is: a. P1,000,000 b. P980,000 c. P950,000 2. The capital balance of King on January 1, 2007 before adjustment is: a. P100,000 b. P125,000 C. P300,000 3. The capital balance of Queen on December 31, 2007 before adjustment is: a. P410,860 b. P374,140 c. P385,000 d. P600,000 d. P400,000 4. What is the effect on 2007 net income of the omission of prepaid insurance, advances from customers, and accrued interest expenses in 2006 and 2007? a. P9,000 understated b. P9,000 overstated c. P5,000 understated d.P14,000 understated 5. What is the carrying value of equipment on December 31, 2007? a. P600,000 b. P540,000 c. P544,000 d. P604,000 6. What should be the balance of the allowance for uncollectible accounts at December 31, 2007? a. P9,800 b. P12,000 c. P15,800 d. P14,500 7. How much is the uncollectible account expense that should have been recognized in 2006? a. P24,500 b. P14,500 c. P12,000 d. P9,500 8. The adjusted net income in 2007 is: a. P1,086,200 b. P1,027,200 c. P1,008,200 d. P1,036,200 9. What should be the capital balance of Prince at December 31, 2007? a. P310,240 b. P300,240 c. P317,240 d. P307,240 10. What is the adjusted capital balance of Queen on January 1, 2007? a. P107,000 b. P89,667 c. P93,000 d. P79,000 11. By how much would the 2006 net income be misstated, if no adjustments were made for the above errors? a. P31,000 overstated b.P31,000 understated c. P21,000 overstated d.P21,000 understated 12. The adjusted partners' equity on December 31, 2007 is: a. P1,315,200 b. P1,336,200 c. P1,306,200 d. P1,365,200 Suggested answers: 1c 2 a 3d 4d 56 76 8d 96 10 c 11c 12 al NEED SOLUTIONS TY The partnership of King, Queen and Prince engaged you to audit its accounting records. Some accounts are on the accrual basis and others are on the cash basis. The partnership's books were closed at December 31, 2007 by the bookkeeper who prepared the general ledger trial balance that appears below. King, Queen and Prince GENERAL LEDGER TRIAL BALANCE December 31, 2007 Debit Credit Cash P 100,000 Accounts receivable 400,000 Inventory 260,000 Land 90,000 Buildings 500,000 Accumulated depreciation-buildings P 20,000 Equipment 560,000 Accumulated depreciation-equipment 60,000 Goodwill 50,000 Accounts payable 550,000 Allowance for future inventory losses 30,000 King, capital 600,000 Queen, capital 400,000 Prince, capital 300.000 Totals P1.960,000 P1.960.000 Your inquiries disclosed the following: 1. The partnership was organized on January 1, 2006 with the partners making equal amount of contributions. The initial partnership agreement calls for an equal distribution of profit or loss among the partners. The partnership agreement was amended effective January 1, 2007 to provide for the following profit and loss ratio: King, 50%, Queen, 30%, and Prince, 20%. The amended partnership agreement also stated that the accounting records were to be maintained on the accrual basis and that any adjustments necessary for 2006 should be allocated according to the 2006 distribution of profits. 2. The following amounts were not recorded: December 31 2007 December 31 2006 Prepaid insurance P7,000 P6,500 Advances from customers 2,000 11,000 Accrued interest expense 4,500 The advances from customers were recorded as sales in the year the cash was received. 3. In 2007 the Partnership recorded a provision of P30,000 for anticipated declines in inventory prices. You convinced the partners that the provision was unnecessary and should be removed from the books. 4. The partnership charged equipment purchased for P44.000 on January 3, 2007 to expense. This equipment has an estimated life of ten years and an estimated salvage value of P4.000. The partnership depreciates its capitalized equipment under the straight-line depreciation method. 5. The partners agreed to establish an allowance for doubtful accounts at two percent of current accounts receivable and five percent of past due accounts. At December 31, 2006 the partnership had P540.000 of accounts receivable, of which only P40,000 was past due. At December 31, 2007 fifteen percent of accounts receivable was past due, of which P40.000 represented sales made in 2006, and was generally considered collectible. The partnership had written off uncollectible accounts in the year the accounts became worthless as follows: Accounts Written Off in 2007 2006 2007 accounts P 8,000 2006 accounts 10,000 2,500 6. Goodwill was recorded on the books in 2007 and credited to the partners' capital accounts in the profit and loss ratio in recognition of an increase in the value of the business resulting from improved sales volume. 7. No other capital transactions took place in 2006 and 2007. 8. Ignore tax implications d. P920,000 Based on the above information, answer the following: 1. The net income of the partnership in 2007, before adjustment is: a. P1,000,000 b. P980,000 c. P950,000 2. The capital balance of King on January 1, 2007 before adjustment is: a. P100,000 b. P125,000 C. P300,000 3. The capital balance of Queen on December 31, 2007 before adjustment is: a. P410,860 b. P374,140 c. P385,000 d. P600,000 d. P400,000 4. What is the effect on 2007 net income of the omission of prepaid insurance, advances from customers, and accrued interest expenses in 2006 and 2007? a. P9,000 understated b. P9,000 overstated c. P5,000 understated d.P14,000 understated 5. What is the carrying value of equipment on December 31, 2007? a. P600,000 b. P540,000 c. P544,000 d. P604,000 6. What should be the balance of the allowance for uncollectible accounts at December 31, 2007? a. P9,800 b. P12,000 c. P15,800 d. P14,500 7. How much is the uncollectible account expense that should have been recognized in 2006? a. P24,500 b. P14,500 c. P12,000 d. P9,500 8. The adjusted net income in 2007 is: a. P1,086,200 b. P1,027,200 c. P1,008,200 d. P1,036,200 9. What should be the capital balance of Prince at December 31, 2007? a. P310,240 b. P300,240 c. P317,240 d. P307,240 10. What is the adjusted capital balance of Queen on January 1, 2007? a. P107,000 b. P89,667 c. P93,000 d. P79,000 11. By how much would the 2006 net income be misstated, if no adjustments were made for the above errors? a. P31,000 overstated b.P31,000 understated c. P21,000 overstated d.P21,000 understated 12. The adjusted partners' equity on December 31, 2007 is: a. P1,315,200 b. P1,336,200 c. P1,306,200 d. P1,365,200 Suggested answers: 1c 2 a 3d 4d 56 76 8d 96 10 c 11c 12 al NEED SOLUTIONS TY