Q1. Problems

You have been asked by a client to audit the financial statements of Yellow Company for the first time.
In examining the books, you found out that certain adjustments have been overlooked at the end of
2017 and 2018. You also discovered the other items had been improperly recorded. These omissions
and other failure for each year are summarized below:
2017 2018
Merchandise inventory, end P10,000 overstated P8,000 understated
Advances to supplier were recorded as 20,000 40,000
purchases but the merchandise was received in
the following year.
Advances from customers recorded as sales but 20,000 70,000
the goods were delivered in the following year.
Improvements on building had been charged to 100,000
expense on January 1, 2017. Improvements
have a life of five years.
On January 1, 2017, an equipment costing
P40,000 was sold for P20,000. At the date of
sale, the equipment had an accumulated
depreciation of P15,000. The cash received was
recorded as other income in 2017.
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2017 net income?
Understated by 45,000
Overstated by 115,000
2. What is the total effect of the errors on the 2018 net income?
Overstated by 8,000
3. What is the total effect of the errors on the company’s working capital at December 31, 2018?
4. What is the total effect of the errors on the balance of the company’s retained earnings at
December 31, 2018?
5. Necessary adjusting entries at December 31,2018 would require a net:

Debit to Retained earnings 45,000
Credit to Sales 50,000
Credit to Purchases 20,000
Debit to Equipment 40,000
Ron-Ron Storage underwent a restructuring in 2020. The company conducted a thorough internal
audit, during which the following facts were discovered. The audit occurred during 2020 before any
adjusting entries or closing entries are prepared.
a. Additional printers were acquired at the beginning of 2018 and added to the company’s office
network. The P9,000 cost of the printers was inadvertently recorded as maintenance expense.
The printers have five-year useful lives and no material salvage value. This class of equipment is
depreciated by the straight-line method.
b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the
expenditure as office supplies on hand. The error was discovered a week later.
c. On December 31, 2019, inventory was understated by P112,000 due to a mistake in the physical
inventory count. The company uses the periodic inventory system.
d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares, P1) as
follows:
Retained earnings 4,000
Common stock 4,000
The shares had a market price at the time of P10 per share.
e. At the end of 2019, the company failed to accrue interest expense that accrued during the last four
months of 2019 on bonds payable. The bonds which were issued at face value mature in 2024.
The following entry was recorded on March 1, 2020, when the semi-annual interest was paid:
Interest expense 180,000
Cash 180,000
f. A three-year liability insurance policy was purchased at the beginning of 2019 for P216,000. The
full premium was debited to insurance expense at the time.
Questions
1. Net income of 2018 is:

Overstated by P9,000
Understated by P9,000
2. Net income of 2019 is

3. Net income of 2020 is

4. Accrued interest on Bonds Payable is

P 60,000
P 80,000
P 120,000
P 180,000
Solution
2004 2005 2006
A 9,000
(1,800) (1,800) (1,800)
B
C 112,000 (112,000)
D
E (120,000) 120,000
(120,000)
F ________ 144,000 (72,000)
_
Under/(Over) 7,200 134,200 185,800
Answer:
1. D 2. B 3. B 4. C
Branzuela Corporation reported the following amounts of net income for the years ended December 31, 2018,
2019 and 2020:
2018 P127,000
2019 150,000
2020 128,500
You are performing the audit for the year ended December 31, 2020. During your examination, you discover the
following errors:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2019 P14,000 understated
December 31, 2020 P23,000 overstated
b. On December 29, 2020, Branzuela recorded as a purchase, merchandise in transit, which cost P15,000. The
merchandise was shipped FOB Destination and had not arrived by December 31. The merchandise was not
included in the ending inventory.
c. Branzuela records sales on the accrual basis but failed to record sales on account made near the end of
each year as follows
2018 P4,000
2019 5,000
2020 3,500
d. The company failed to record accrued office salaries as follows:
December 31, 2018 P10,000
December 31, 2019 14,000
e. On March 1, 2019, a 10% stock dividend was declared and distributed. The par value of the shares amounted
to P10,000 and market value was P13,000. the stock dividend was recorded as follows:
Miscellaneous expense P13,000
Common stock 10,000
Retained earnings 3,000
f. On July 1, 2019, Branzuela acquired a three-year insurance policy. The three-year premium of P6,000 was
paid on that date, and the entire premium was recorded as insurance expense.
g. On January 1, 2020, Branzuela retired bonds with a book value of P120,000 for P106,000. The gain was
incorrectly deferred and is being amortized 10 years as a reduction of interest expense on other outstanding
obligations.
Questions:
1. What is the adjusted net income for the year ended December 31, 2018?
P133,000
P121,000
P117,000
P113,000
P159,000
P160,000
P179,000
P187,000
P129,600
P131,600
P139,600
P142,600
4. What adjusting entry should be made on December 31, 2020 to correct the error described in
item B?
Dr. Accounts payable 15,000; Cr. Purchases 15,000
Dr. Purchases 15,000; Cr. Accounts payable 15,000
Dr. Accounts payable 15,000; Cr. Cash 15,000
Dr. Accounts payable 15,000; Cr. Retained earnings 15,000
5. The adjusting entry on December 31, 2019 to correct the error described in item E should
include a debit to
Common stock P10,000
Additional paid in capital, P3,000
Retained earnings, P16,000
Miscellaneous expenses, P3,000
Solution
2003 2004 2005
Unadjusted Net 127,000 150,000 128,500
Income
A 14,000 (14,000)
(23,000)
B 15,000
C 4,000 (4,000)
5,000 (5,000)
3,500
D (10,000) 10,000
(14,000) 14,000
E 13,000
F 5,000 (2,000)
G 14,000
___________ ___________ (1,400)
Adjusted Net Income 121,000 179,000 129,600
Answer:
1. B 2. A 3. D 4. A 5. B
Statement of Cash Flows

1. How much is the total cash paid to suppliers in 2018?
2,200,000
5,700,000
2,000,000
1,700,000
2. How much is the total cash paid for income tax in 2018?
470,000
270,000
220,000
420,000
3. How much is the net cash provided by (or used in) operating activities?
1,372,292
1,827,292
1,777,292
517,292
4. How much is the net cash provided by (or used in) investing activities?
(600,000)
(1,189,230)
350,000
544,230
5. How much is the net cash provided by (or used in) financing activities?
370,000
(350,000)
720,000
270,000

Q1. Problems

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Q1. Problems

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You have been asked by a client to audit the financial statements of Yellow Company for the first time.

5. Necessary adjusting entries at December 31,2018 would require a net:

1. Net income of 2018 is:

2. Net income of 2019 is

3. Net income of 2020 is

4. Accrued interest on Bonds Payable is

December 31, 2020 P23,000 overstated

December 31, 2019 14,000

Common stock 10,000

Retained earnings 3,000

Statement of Cash Flows

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