National University

Manila

Integrated Auditing Review BLD

1st Trimester 2020-2021

Correction of Errors, Cash to Accrual, Single Entry

Problem 1
The following errors in connection with your examination of the financial statements of the AAA Corporation
were discovered:

1. Accrued interest expense of P30,000 was not recorded at the end of 2020.
2. Accrued rent receivable of P40,000 was not recorded at the end of 2020.
3. The company paid one-year insurance premium of P72,000 effective March 1, 2020. The entire amount was
debited to expense account and no adjustment was made at the end of 2020.
4. The company leased a portion of its building for P60,000. The term of the lease is one year ending April 1,
2021. Collection of rent was credited to rent revenue account. At the end of 2020, no entry was made to
take up the unearned portion of the amount collected.

The following data were extracted from the financial statement of AAA Corporation:

2020 2021
Net income P400,000 P320,000
Working capital 360,000 520,000
RE, end of the year 400,000 720,000

Based on the above data, determine the following:

1. Net income in 2020
a. 370,000 c. 407,000
b. 382,000 d. 410,000

2. Working capital 2020

a. 330,000 c. 370,000
b. 367,000 d. 412,000

3. Retained earnings 2020

a. 370,000 c. 407,000
b. 382,000 d. 410,000

4. Net income in 2021

a. 298,000 c. 313,000
b. 310,000 d. 325,000

5. Working capital 2021

a. 480,000 c. 532,000
b. 520,000 d. 550,000

6. Retained earnings 2021

a. 680,000 c. 720,000
b. 708,000 d. 750,000

Problem 2
The following errors in connection with your examination of the financial statements of the BBB Corporation
were discovered:

1. Purchase of merchandise on account on December 24, 2020 amounting to P120,000 was not recorded until
it was paid in January 2021. The merchandise was properly included in the ending inventory in 2020.

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Correction of Errors, Cash to Accrual, Single Entry
2. Sale of merchandise on account on December 30, 2020 amounting to P160,000 was not recorded until it was
collected in January 2021. The merchandise was properly excluded in the ending inventory in 2020.
3. On December 31, 2020, the ending inventory was overstated by P40,000.

The following data were extracted from the financial statement of BBB Corporation:

2020 2021
Net income P400,000 P320,000
Working capital 360,000 520,000
RE, end of the year 400,000 720,000

Based on the above data, determine the following:

1. Net income in 2020
a. 240,000 c. 400,000
b. 280,000 d. 440,000

2. Working capital 2020

a. 240,000 c. 400,000
b. 360,000 d. 480,000

3. Retained earnings 2020

a. 240,000 c. 400,000
b. 280,000 d. 440,000

4. Net income in 2021

a. 280,000 c. 400,000
b. 320,000 d. 440,000

5. Working capital 2021

a. 360,000 c. 520,000
b. 480,000 d. 640,000

6. Retained earnings 2021

a. 560,000 c. 760,000
b. 720,000 d. 840,000

Problem 3
The following errors in connection with your examination of the financial statements of the CCC Corporation
were discovered:

a. The company paid a one-year insurance premium of P72,000 effective March 1, 2020. The entire amount
was debited to asset account and no adjustment was made at the end of 2020.
b. The company leased a portion of its building for P60,000. The term of the lease is one year ending April 30,
2021. Collection of rent was credited to unearned rent revenue account. At the end of 2020, no entry was
made to take up the earned portion of the amount collected.
c. Depreciation expense in 2020 was overstated by P24,000.
d. Improvements on building amount amounting P400,000 had been charge to expense on January 1, 2020.
Improvements have a life of 4 years.
e. On January 1, 2020, an equipment costing P120,000 was sold for P40,000. At the date of sale, the
equipment had an accumulated depreciation of P96,000. The cash received was recorded as other income in
2020.
f. Repairs and maintenance expense on the building amounting to P40,000 had been charge to the building
account on January 1, 2020. Depreciation expense has been recorded in 2020 to 2021 based on the 4 year
remaining useful life of the building.

The following data were extracted from the financial statement of CCC Corporation:

2020 2021
Net income P400,000 P320,000
Working capital 360,000 520,000
RE, end of the year 400,000 720,000

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Correction of Errors, Cash to Accrual, Single Entry

Based on the above data, determine the following:

1. Net income in 2020
a. 388,000 c. 433,000
b. 412,000 d. 650,000

2. Working capital 2020

a. 340,000 c. 400,000
b. 360,000 d. 480,000

3. Retained earnings 2020

a. 388,000 c. 433,000
b. 412,000 d. 650,000

4. Net income in 2021

a. 238,000 c. 318,000
b. 308,000 d. 323,000

5. Working capital 2021

a. 508,000 c. 552,000
b. 520,000 d. 535,000

6. Retained earnings 2021

a. 700,000 c. 732,000
b. 720,000 d. 888,000

Problem 4
DDD Company 2020 year end financial statement contained the following errors.

December 31, 2019 December 31, 2020

Ending inventory P140,000 under P125,000 over
Depreciation expense 30,000 under

An insurance premium of P60,000 was prepaid in 2019 covering the years 2019, 2020, and 2021. The same was
charged to expense in full in 2019. In addition, on December 31, 2020, a fully depreciated machinery was sold
for P140,000 cash, but the sale was not recorded until 2021. There were no other errors during 2019,2020 and
2021 and no corrections have been made for any of the errors. Ignore income tax considerations.

Based on the above and the result of your audit, answer the following

1. What is the net effect of the errors on the 2019 profit? Indicate if over or under.
2. What is the net effect of the errors on the 2020 profit? Indicate if over or under.
3. What is the net effect of the errors on the company's working capital at December 31,2020? Indicate if over
or under.
4. What is the net effect of the errors on the balance of the company's retained earnings at December
31,2020? Indicate if over or under.
5. What is the net effect of the errors on the company's working capital at December 31,2021? Indicate if over
or under.

Problem 5
You were engaged by EEE Company to audit its financial statements for the first time. In examining the books,
you found out that certain adjustments had been overlooked at the end of 2019 and 2020. You also discovered
that other items had been improperly recorded. These omission and other failures for each year are summarized
below

December 31, 2020 December 31, 2019

Salaries payable P891,000 P932,000
Interest receivable 223,800 264,200
Prepaid insurance 376,300 412,100

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Correction of Errors, Cash to Accrual, Single Entry
Advances from customers 621,400 667,000
(Collections from customers had
been recorded as sales but should
have been recognized as advances
from customers because goods
were not shipped until the
following year)

Machinery(Capital expenditures 725,400 824,200

had been recorded as repairs but
should have been charged to
Machinery the depreciation rate is
10% per year, but depreciation in
the year of expenditure is to be
recognized at 5%)

Based on the above and the result of your audit, answer the following

1. What is the net effect of the errors on the 2019 profit? Indicate if over or under.
2. What is the net effect of the errors on the 2020 profit? Indicate if over or under.
3. What is the net effect of the errors on the company's working capital. Indicate if over or under.
4. What is the net effect of the errors on the balance of the company’s retained earnings on December 31,
2020. Indicate if over or under.

Problem 6
The FFF Company engaged you in 2020 to examine its books and records and to make whatever adjustments as
necessary.
Your examination disclosed following

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS
Date Particulars Debit Credit Balance
2018
Jan.1 Balance P580,000
Dec.31 Profit for the year 310,000 890,000
2019
Jan.31 Dividends paid 140,000 750,000
Apr.3 Paid in capital in 154,500 904,500
excess of par
Dec.31 Loss for the year 205,000 699,500
2020
Jan.31 Dividends paid 100,000 599,500
Dec.31 Loss for the year 165,500 P434,000

b. Dividends had been declared on December 31 in 2018 and 2019 but had not been entered in the books until
paid.
c. The company purchased a machine worth P270,000 on April 30, 2017. The company charged the purchase
to expense. The machine has an estimated useful life of 3 years. The company uses the straight line method
and residual values are deemed immaterial.
d. The company received a transportation equipment as donation from one of its shareholders on September
30,2019. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a
remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000
was incurred for registering the transfer of ownership. The company did not record the donation on its
books. The expenses paid related to the donated equipment were charged to expense.
e. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the end of 2018
and 2019, respectively.
f. The merchandise inventories at the end of 2019 and 2020 did not include merchandise that was then in
transit shipped FOB shipping point. These shipments of P43,400 and P32,600 were recorded as purchases in
January 2020 and 2021, respectively.

Based on the above audit findings, the adjusted balances of the following are (Disregard tax implication)
1. Retained earnings, 12/31/17

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Correction of Errors, Cash to Accrual, Single Entry
2. Profit for 2018
3. Retained earnings, 12/31/18
4. Loss for 2019
5. Retained earnings, 12/31/19
6. Loss for 2020
7. Retained earnings, 12/31/20

Problem 7
You were able to gather the following in connection with your audit of GGG Company for the year ended
December 31, 2020:

12/31/2019 12/31/2020
Accounts receivable P12,800,000 P8,000,000
Unpaid merchandise invoices ? 5,242,000
Accrued wages 170,000 250,000
Advertising supplies inventory 70,000 160,000
Accrued advertising 28,500 80,000
Prepaid insurance 50,000 -
Unexpired insurance - 82,000

During the year:

Amount collected from customers, P20,000,000.
Total payments to suppliers of merchandise, P27,236,000
Total payments to suppliers of merchandise of prior years, P9,264,000
Wages paid, P6,100,000
Advertising paid which includes P70,000 applicable for 2021, P600,000
Insurance premium paid, P250,000

Based on the above and the result of your audit, determine the following under accrual basis:
1. Net sales for 2020
a. P12,800,000 c. P15,200,000
b. P24,800,000 d. P28,000,000

2. Net purchases for 2020

a. P23,214,000 c. P27,236,000
b. P31,258,000 d. P32,478,000

3. Wages expenses for 2020

a. P6,020,000 c. P6,100,000
b. P6,180,000 d. P6,200,000

4. Advertising Expense for 2020

a. P491,500 c. P520,000
b. P561,500 d. P600,000

5. Insurance expenses for 2020

a. P168,000 c. P200,000
b. P218,000 d. P282,000

Problem 8
HHH’s business, a calendar year sole-proprietorship, maintained its books on the cash basis during the year.

HHH is in the process of negotiating a bank loan to finance the planned expansion of its business. The bank is
requesting 2020 financial statements prepared on the accrual basis of accounting from HHH. As HHH’s external
auditor, you were called upon to assist in preparing the financial statements. The following information were
obtained during the course of your engagement:
HHH’s Business
TRIAL BALANCE
December 31, 2020
Debits Credits
Cash P448,000
Accounts Receivable,12/31/19 283,500

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Correction of Errors, Cash to Accrual, Single Entry
Inventory,12/31/19 1,085,000
Furniture and Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated Depreciation,12/31/19 P567,000
Accounts Payable 297,500
HHH’s Drawings -
HHH’s capital 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries Expense 3,045,000
Taxes and Licenses 217,000
Insurance expense 152,250
Rent Expense 598,500
Utilities expense 220,500
Living expenses 227,500
P14,472,500 P14,472,500

a. At December 31,2020, amounts due from customers totaled P415,000.

b. Based on the analysis of the above receivables, P20,750 may prove uncollectible.
c. Unpaid invoices for plant purchases totaled P533,750 and P297,500 at December 31, 2020 and December
31, 2019 respectively.
d. The inventory totaled P1,274,000 based on physical count of the goods at December 31,2020. The inventory
was priced at cost, which approximates market value.
e. On May 1,2020, HHH paid P152,250 to renew its comprehensive insurance for one year. The premium on
the previous policy which expired on April 30,2020 was P136,500.
f. On January 2, 2020 HHH entered into a twenty-year operating lease for the vacant lot adjacent HHH’s retail
store used as a parking lot. As agreed in the lease, HHH paved and fenced in the lot at a cost of P787,500.
The improvement were completed on April 1,2020 and estimated to have a useful life of fifteen years. No
provision for deprecation has been recorded. Depreciation on furniture and fixture was P210,000 for 2020.
g. Accrued expenses at December 31, 2020 and 2019 were as follows:

2020 2019
Taxes and licenses P33,750 P20,250
Utilities 36,000 24,750
P69,750 P45,000

h. HHH is being sued for P4,000,000. The coverage under the comprehensive insurance policy is limited to
P2,500,000. HHH’s attorney believes that an unfavorable outcome is probable and that a reasonable
estimate of the settlement is P3,000,000.
i. The salaries account includes P40,000 per month paid to the proprietor. HHH also receives P4,375 per week
for living expenses.

Determine the amount to be reported for the following items in HHH’s financial statements as of and for the
year ended December 31,2020 under accrual basis of accounting. (Disregard income taxes)

1. Net Income
2. Current Assets
3. Noncurrent assets
4. HHH capital,12/31/19
5. HHH capital,12/31/20

Problem 9
An analysis of incomplete records of III Corporation produced the following information applicable to 2020:

ACCOUNT INCREASES
Cash P8,400,000
Accounts receivable 2,800,000
Accounts payable 800,000
Prepaid insurance 400,000

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Correction of Errors, Cash to Accrual, Single Entry

ACCOUNT DECREASES
Inventory 2,000,000
Equipment 200,000
Notes receivable 1,200,000
Accrued salaries payable 600,000

Summary of cash transactions were as follows:

RECEIPTS:
Cash sales P6,000,000
Collections on accounts receivable 60,000,000
Collections on notes receivable 4,800,000
Interest on notes receivable 400,000
Purchase returns and allowances 1,000,000

DISBURSEMENTS:
Cash purchases 2,000,000
Payments on accounts payable 33,000,000
Sales returns and allowances 800,000
Insurance 1,400,000
Salaries 20,000,000
Equipment 1,600,000
Other expenses 3,000,000
Dividends 2,000,000

Additional information:
Total purchase returns and allowances amounted to P1,600,000.
Total sales returns and allowances amounted to P2,400,000.

Determine the audited balances of the following:

1. Net sales
a. 71,600,000 c. 73,200,000
b. 72,400,000 d. 74,000,000

2. Net purchases
a. 35,800,000 c. 34,800,000
b. 35,400,000 d. 34,000,000

3. Cost of sales
a. 36,000,000 c. 37,400,000
b. 36,800,000 d. 37,800,000

4. Depreciation expense
a. 200,000 c. 1,800,000
b. 1,600,000 d. 2,000,000

5. Net income
a. 10,000,000 c. 10,400,000
b. 10,300,000 d. 11,800,000

Problem 10
The following data are obtained from the single entry records kept by JJJ Merchandising for 2020:
December 31 January 1
Cash 1,600,000 1,200,000
Accounts receivable 2,000,000 1,600,000

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Correction of Errors, Cash to Accrual, Single Entry
Notes receivable 1,200,000 400,000
Inventories 960,000 1,600,000
Equipment 1,120,000 1,200,000
Accounts Payable 480,000 720,000
Notes Payable 1,040,000 1,200,000
Accrued Interest Payable 40,000 80,000
Unearned rent Income 40,000 120,000

The cashbook shows the following information:

Balance, January 1 1,200,000
Receipts:
Accounts Receivable (after discounts of P100,000) 3,000,000
Notes receivable 960,000
Cash Sales 800,000
Rent Income 80,000
Sale of equipment costing P200,000
and book value of P100,000 120,000
Additional cash investment by the owner 600,000 5,560,000

Payments:
Accounts Payable 1,520,000
Notes payable 1,280,000
Cash purchases 600,000
Interest Expense 160,000
Expenses 800,000
Equipment 400,000
Withdrawals by owner 400,000 5,160,000
Balance, December 31 P1,600,000

Audit Notes:
• Accounts receivable of P120,000 was written off as uncollectible.
• Returns of P320,000 were on merchandise s1ales.
• Allowances for P80,000 were received in merchandise purchases.

Determine the audited balances of the following:

1. Net Sales
2. Net Purchases
3. Cost of Sales
4. Rent Income
5. Interest expense
6. Depreciation expense
7. Net Income

“Logic will get you from A to B. Imagination will take you everywhere.” – A.Einstein

Auditing by: Bee Jay L. De Leon, CPA Page 8