NU - Correction of Errors Single Entry Cash To Accrual
NU - Correction of Errors Single Entry Cash To Accrual
Manila
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
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.
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
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
Problem 4
DDD Company 2020 year end financial statement contained the following errors.
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
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
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
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
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
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
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
ACCOUNT DECREASES
Inventory 2,000,000
Equipment 200,000
Notes receivable 1,200,000
Accrued salaries payable 600,000
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.
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
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.
“Logic will get you from A to B. Imagination will take you everywhere.” – A.Einstein