You are engaged to audit the financial statements of Sailor Co. The balance sheet below is provided to you:
Sailor Co.
Balance Sheet
December 31, 2021
ASSETS LIABILITIES AND CAPITAL
Cash 290,000.00 Accounts payable 190,000.00
Accounts receivable 139,000.00 Notes payable 83,500.00
Notes receivable 200,000.00 Ordinary share capital 300,000.00
Inventory 357,000.00 Retained earnings 412,500.00
Total 986,000.00 Total 986,000.00
The records of Sailor Co. were reviewed. The following errors were discovered. These errors were not
corrected until the current year under audit.
a. On July 1, 2019, Sailor paid P150,000 for a 5-year insurance policy. The amount was debited to
Insurance Expense when paid.
b. Sailor Co. failed to record unearned rent revenue of P16,000 and P9,000 in 2018 and 2020,
respectively.
c. Sailor Co. also failed to recognize accrued expenses of P23,000, P18,000 and P7,000 for 2018, 2019
and 2020, respectively.
d. On December 31, 2019, Sailor Co. bought equipment worth P150,000 and furniture worth P85,000. The
accountant thought that to make things simple in record keeping these should be expensed outright as
it would be all expensed after 5 years anyway. The amount was debited to Miscellaneous Expense.
e. Supplies on hand at the end of 2019, 2020 and 2021 of P5,000, P6,500 and P4,000, respectively, was
not recorded.
Additional information:
a. Inquiry with the client reveals that the policy of the company is to depreciate fixed assets using straight
line method.
b. There are no dividends declared since the beginning of operations on January 1, 2018.
c. The company’s accountant doesn’t know accrual basis of accounting so they have been using cash
basis of accounting.
d. Notes payable is due on December 31, 2023.
e. Notes receivable is due on June 30, 2022.
f. The net income reported for the years 2018-2021 were:
2018 87,500.00
2019 12,500.00
2020 137,000.00
2021 175,500.00
TRUE OR FALSE
Statement 1:The adjusted working capital of Sailor Co. for the year ended December 31, 2021 is P875,000.
Statement 2: The proposed adjusting journal entries to correct the balance sheet includes a credit to Retained Earnings of P220,000.
Statement 3: The adjusted net income for the year ended December 31, 2018 should be P126,500.