TESTBANK

CORRECTION OF ERRORS

Submitted by:
Cantoria, Gaebriele
La Rosa, Karina Ysabelle
Mayangitan, Jan Vincent
Valera, Marian Joyce

CORRECTION OF ERRORS
Multiple Choice Questions

Problem 1

Timm Company failed to recognize accruals and prepayments since the inception of
its business three years ago. The earnings before tax, accrual and prepayments at
the end of the current year are:

Earnings before tax P 1,400,000

Prepaid insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000

1. The corrected earnings before tax should be

a. P 1,385,000 c. P 1,400,000

b. P 1,415,000 d. P 1,375,000

Problem 2

You were engaged by Lanao 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 2009 and 2010. You also discovered that other items had
been improperly recorded. These omissions and other failures for each year are
summarized below:

12/31/2010 12/31/09
a. Salaries payable 780,000 873,600
b. Interest receivable 213,000 259,200
c. Prepaid insurance 307,800 384,000
d. Advances from customers 561,000 470,400
(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)
e. Machinery 522,000 564,000
(Capital expenditures 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%)

2. What is the next effect of the errors on the 2009 profit?

a. Understatement of P 775,800 c. Understatement of P 1,236,600

b. Overstatement of P 165,000 d. Overstatement of P 80,400
3. What is the net effect of the errors on the 2010 profit?

a. Understatement of P 376,500 c. Understatement of P 320,100

b. Overstatement of P 324,300 d. Overstatement of P 380,700

4. What is the net effect of the errors on the balance of the company’s retained
earnings at Dece,ber 31, 2010?

a. Understatement of P 155,100 c. Understatement of P 265,800

b. Overstatement of P 930,900 d. Understatement of P 855,900

Problem 3
BARBADOS, INC. has been using the accrual basis of accounting. However, an
examination of the records reveals that some expenses and revenues have been
handled on a cash basis by the inexperienced bookkeeper of the company. Income
statements prepared by the bookkeeper reported ₱145,000 net income for 2013
and P185,000 net income for 2014. Further review of the records reveals that the
following items handled improperly.

 Rent of P6,500 was received from a lessee on December 23, 2013. It was
recorded as income at that time even though the rental pertains to 2014.

 Salaries payable on December 31 have been consistently omitted from

the records of the date and have been recorded as expenses when paid in
the following year. The salary accruals recorded in this manner were:

December 31, 2012 P5,500

December 31, 2013 7,500
December 31, 2014 4,700

 Invoices for the office supplies purchased have been charged to expense
accounts when received. Inventories of supplies on hand at the end of
each year have been ignored, and no entry has been made for them.

December 31, 2012 P6,500

December 31, 2013 3,700
December 31, 2014 7,100

5. What is the corrected net income for 2013?

a. P 133,700 c. P 146,700
b. P 144,200 d. P 139,300

6. What is the corrected net income for 2014?

a. P 184,700 c. P 185,600
b. P 197,700 d. P 190,900
Problem 4
The condensed income statement of SURINAME, INC. for the year ended December
31, 2014, is presented below:

Suriname, Inc.
INCOME STATEMENT
For the Year Ended December 31, 2014

Sales ₱1,000,000
Cost of goods sold 600,000
Gross income 400,000
Operating expenses 150,000
Net Income ₱ 250,000
The December 31, 2014, audit of the company’s financial statements disclosed the
following errors:

 December 31, 2014, inventory understated ₱31,000.

 Accrued expenses ₱4,000 and prepaid expenses of ₱6,000 were not

recognized in the company’s books.

 Sales of ₱5,000 were not recorded until January 2015, although the goods
were shipped December 2014, and were excluded from the December 31
physical inventory.

 Purchases of ₱30,000 made in December 2014, were not recorded although

the goods were received and properly included in the December 31 physical
inventory.

 A machine was sold for ₱10,000 on July 1, 2014, and the proceeds were
credited to the Sales account. The machine was acquired on January 1, 2011,
for ₱60,000. At that time, it had an estimated life of 6 years with no residual
value. No depreciation was recorded on this machine in 2014.

7. What is the corrected net income for the year ended December 31, 2014?

a. P 228,000 c. P 258,000
b. P 166,000 d. P 224,000

Problem 5

The December 31 year-end financial statements of SAMOA COMPANY contained the

following errors:

Dec. 31, 2013 Dec. 31, 2014

 Ending inventory P 48,000 understated P 40,500
0verstated
Depreciation expense P 11,500 understated --------

An insurance premium of P330,000 was prepaid in 2013 covering the years 2013,
2014, and 2015. The entire amount was changed to expense in 2013. In addition, on
December 31, 2014, a fully depreciated machinery was sold for P75,000 cash, but
the sale was not recorded until 2015. There were no other errors during 2013 and
2014, and no corrections have been made for any of the errors. Ignore income tax
defects.

8. What is the total effect of the errors on Samoa’s 2014 net income?

a. Overstatement of P 123,500 c. Understatement of P 192,500

b. Overstatement of P 27,500 d. Understatement of P 177,500

9. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2014?

a. Overstatement of P 75,500 c. Understatement of P 225,500

b. Overstatement of P 40,500 d. Understatement of P 144,500

10. What is the total effect of the errors on the balance of Samoa’s retained
earnings at December 31, 2014?

a. Understatement of P 156,000 c. Understatement of P 133,000

b. Overstatement of P 87,000 d. Understatement of P 85,000

Problem 6

In 2014, Cremas Company discovered that equipment purchased on January 1, 2012

for P600,000 was expensed at that time. The equipment should have been
depreciated over 5 years with no residual value.

11. What is the effect of the error on the retained earnings at January 1, 2014?

a. Understatement of P 360,000 c. Overstatement of P 360,000

b. Understatement of P 240,000 d. Understatement of P 480,000

Problem 7

CHILE CO. reported pretax income of ₱505,000 and ₱387,000 for the years ended
December 31, 2013 and 2014, respectively. However, the auditor noted that the
following errors had been made:
 A. Sales for 2013 included amounts of ₱191,000 which had been received in
cash during 2013, but for which the related goods were shipped in 2014. Title
did not pass to the buyer until 2014.

B. The inventory on December 31, 2013, was understated by ₱43,200.

C. The company’s accountant, in recording interest expense for both 2013 and
2014 on bonds payable, made the following entry on an annual basis:

Interest expense 75,000

Cash 75,000

The bonds have a face value of ₱1,250,000 and pay a nominal interest rate of
6%. They were issued at a discount of ₱75,000 on January 1, 2013, to yield
an effective interest rate of 7%.

D. Ordinary repairs to equipment had been erroneously charged to the

Equipment account during 2013 and 2014. Repairs of ₱42,500 and ₱47,000
had been incurred in 2013 and 2014, respectively. In determining
depreciation charges, Chile applies a rate of 10% to the balance in the
Equipment account at the end of the year.

12. What is the corrected pretax income for 2013?

a. P 303,200 c. P 311,700
b. P 225,300 d. P 307,450

13. What is the corrected pretax income for 2014?

a. P 488,992 c. P 484,292
b. P 480,042 d. P 575,392

Problem 8

Bakekz Company showed income before income tax of P6,500,000 on December 31,
2010. The year-end verification of the transactions of the company revealed the
following errors:

 P1,000,000 worth of merchandise was purchased in 2010 and included in the

ending inventory. However, the purchase was recorded only in 2011.
 A merchandise shipment valued at P1,500,000 was properly recorded as
purchase at year-end. Since the merchandise was still at the port area, it was
inadvertently omitted from the inventory balance of December 31, 2010.
 Advertising for December 2010, amounting to P500,000, was recorded when
payment was made by the firm in January 2011.
  Rental of P300,000 on an equipment, applicable for six months, was received
on November 1, 2010. The entire amount was reported as income in 2010.
 Insurance premium covering the period from July 1, 2010 to July 1, 2011,
amounting to P200,000 was paid and recorded as expense on July 31, 2010.
The entity did not make any adjustment at the end of the year.

14. The correct income before tax for 2010 should be

a. P 6,900,000 c. P 6,500,000
b. P 6,400,000 d. P 6,300,000

15. What was the effect of the errors on the total liabilities at December 31, 2010?

a. Understatement of P 1,500,000 c. Understatement of P

1,000,000
b. Understatement of P 1,200,000 d. Understatement of P
1,700,000

Problem 9
You were engaged in for the first time to audit the financial statement of Vivar
Corporation for the period ended December 31, 2016. The company started its
operation in 2014. In reviewing the books, the auditor discovered that certain
adjustments had either been overlooked or improperly recorded at the end of year
to 2016. Omissions and other failures for each year summarized below:

December 31
2014 2015 2016
1. Omissions of the following year-end
accruals/deferrals:
a. Accrued utilities expense 5,000 7,000 6,000
b. Accrued interest income 2,000 4,000 3,000
c. Prepaid rent expense - 2,000 1,000
d. Unearned royalty income 8,000 - 3,000
2. Delivery of merchandise at year-end from
suppliers, recorded as sales upon collection 5,000 - 10,000
the following year.
3. Receipt of merchandise at year-end from
suppliers, recorded as purchases upon 6,000 3,000
payment the following year.
4. Cash received from customers at year-ends,
recorded as sales, deliveries yet to be made
the following year. In the year of collection, 3,000 - 5,000
corresponding inventories at cost were
included in the physical count.
5. Payments to suppliers at year-end for goods to 2,000 1,000
be received the following year, under FOB
 Destination, recorded as purchases upon
payment. Inventories were included in
physical count at the year when these were
received.
6. Overstatement in year-end inventories 9,000 - 7,000
7. understatement in year-end inventories 4,000 -
8. Organization costs incurred in the start-up of
the business at the beginning of 2014 was
50,000 - -
capitalized by the company as an intangible
asset and has been amortized for 5 years
9. Major repairs on the company’s equipment
were recognized as outright expenses. The
company depreciates equipment at 20% per - 35,000 40,000
annum, but depreciation in the year of the
expenditure is at 10%

The company’s books also revealed the following information:

2014 2015 2016

Accumulated Profits 235,000 691,000 1,001,00
0
Profit 345,000 586,000 460,000
Dividend declared and distributed 110,000 130,000 150,000

16. Adjusted profit for 2014?

a. 287,000 c. 491,000
b. 644,500 d. 691,500

17. Adjusted profit for 2015?

a. 287,000 c. 491,000
b. 644,500 d. 691,500

18. Adjusted profit for 2016?

a. 287,000 c. 491,000
b. 644,500 d. 691,500

Problem 10
You were assigned to audit the financial statements of Rhea Corp. for the first time
for the period ended December 31, 2016. In line with your audit, the following
information were made available:
a. A collection for rental amounting to P45,000 of one of its idle properties
covering the period July 1, 2015 to June 30, 2016 was received and recorded as
rent income in July 1, 2015.

b. the following were consistently omitted at each year-end.

2014 2015 2016
Salaries Payable 5,000 3,600 9,900
Unused Office supplies 5,400 9,000 6,100
Accrued royalty income 4,000 7,900 5,400

c. The following deliveries were made to customers at each year-end but were
recorded as sales only upon cash collection the following year. All sales were
made FOB Shipping Point and the related inventories were included in the
physical count conducted ever December 31:
2014 2015 2016
Sales price 28,000 30,000 22,000
Cost of goods 15,400 17,400 13,200

d. A major repair cost improving the operating efficiency of an equipment was

incurred at the beginning of 2014. The cost amounting to P55,000 was
recognized as an outright repairs and maintenance expense. The equipment
was acquired on January 2010 with a total useful life of 15 years.

e. Dividend amounting to P120,000 was declared on December 20, 2016 to

stockholders as of the same date and were recorded upon payment the
following year January 20, 2017.

f. the general ledger of the company’s accumulated profits account contained the
following information:
Date Particulars Debit Credit
1/1/14 Balance 625,400
1/3/14 Excess over par for ordinary shares issued 120,000
12/31/1 Net loss for the year 177,400
4
1/5/15 FMV of land donated by majority stockholder 480,000
12/31/1 Net income for the year 214,300
5
1/3/16 Cash dividend payment, declared 12/20/15 90,000
12/30/1 Loss on sale of an equipment 22,000
6
12/31/1 Net income for the year 421,700
6
12/31/1 Balance 1,571,50
6 0
19. What is the adjusted net loss for 2014?

a. (95,900) c. (95,500)
b. (110,900) d. (115,900)

20. What is the adjusted net income for 2015?

a. 218,700 c. 191,200

b. 198,200 d. 196,200

21. What is the correct retained earnings ending balance 2016?

a. 901,900 c. 1,021,900
b. 924,400 d. 956,900

22. What is the effect of the errors to the 2016 working capital?

a. 109,600 overstated c. 10,400 understated

b. 96,500 overstated d. 23,600 understated

Problem 11
You were engaged by MONSTA X Corp. to audit its financial statements for the first
time. You discovered that certain adjustments had been overlooked at the end of
2013 and 2014. Moreover, you also discovered that some items had been omitted
or erroneously recorded. The said omissions and other failures for each year are
noted below:

2013 2014
a. Prepaid insurance 256,000 205,200
b. Accrued salaries and wages 582,400 520,000
c. Accrued interest income 172,800 142,000
d. Advances from customers 313,600 374,000
e. Capital expenditures charged as 376,000 348,000
expense

Audit notes:

a. 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.

b. Capital expenditures had been recorded as repairs but should have been charged
to the Machinery account; 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:

23. What is the total effect of the errors on the 2014 net income?

a. Understated by 251,000 c. Understated by 213,400

b. Overstated by 216,200 d. Overstated by 253,800

24. What is the effect of the errors on the company's working capital as of
December 31, 2014?

a. Understated by 202,200 c. Understated by 177,200

b. Overstated by 79,600 d. Overstated by 546,800

25. If remained unadjusted, what will be the effect of the errors to the company's
December 31, 2014 accumulated profits?

a. Understated by 103,400 c. Understated by 177,200

b. Overstated by 620,600 d. Overstated by 579,600

Problem 12
WannaOne Co.'s net income for 2012, 2013 and 2014 were P100,000, P145,000 and
P 185,000; respectively. The following items were not handled properly.

a. Rent of P6500 for 2015 was received from a lessee on December 23, 2014, and
recorded as outright income in 2014.

b. Salaries payable at the end of the following years were omitted:

December 31, 2011 P2,500

December 31, 2012 P5,500

December 31, 2013 P7,500

December 31, 2014 P4,700

c. The following unused office supplies were omitted in the accounting records:

December 31, 2011 P3,500

December 31, 2012 P6,500

December 31, 2013 P3,700

December 31, 2014 P7,100

d. On January 1, 2012, the company completed major repairs on the company's
machinery and equipment totaling P220,000, which was expensed outright. The
said equipment has remaining useful life of 5 years as of January 1, 2012. As of
December 31, 2014, the equipment had an original cost of P500,000 and book value
of P250,000.

26. The corrected net income for year 2012 is:

a. 80,000 c. 240,000
b. 234,000 d. 300,000

27. The corrected net income for year 2013 is:

a. 113,700 c. 126,700
b. 120,200 d. 139,300

28. The corrected net income for year 2014 is:

a. 184,700 c. 165,600
b. 170,900 d. 164,700

29. The effect of the above errors on the beginning of 2014 beginning retained
earnings is:

a. 176,200 under c. 116, 200 under

b. 136,200 under d. 3,800 over

30. The effect of the above errors on 2014 working capital is:

a. 4,100 under c. 8,900 under

b. 4,100 over d. 8,900 over

Long Problems

Problem 1

Criselle Company began operations on January 1, 2009. Financial statements for the
years 2009 and 2010 contained the following errors:

2009 2010
Ending inventory P 800,000 under P 400,000 over
Depreciation P 150,000 under
Insurance expense P 50,000 over P 50,000 under
Prepaid insurance P 50,000 under
In addition, on December 31, 2010, a fully depreciated equipment was sold for
P100,000 cash but the sale was not recorded until 2011. Ignoring income tax, what
is the total effect of the errors on:

1. Net income for 2009?

2. Net income for 2010?

3. Working capital on December 31, 2010?

4. Retained earnings on January 1, 2010?

5. Retained earnings on December 31, 2010?

Problem 2

The following information pertains to VANUATU COMPANY’s depreciable assets:

 Machine X was purchased for ₱150,000 on January 1, 2009. The entire cost
expensed in the year of acquisition. The estimated useful life of this machine
is 15 years with no residual value.
 Machine Y cost ₱525,000 and was acquired on January 1, 2010. On the
acquisition date, the expected useful life was 12 years with no residual value.
The straight-line depreciation method was used. On January 2, 2014, it was
estimated that the remaining life of the asset would be 4 years and that there
would be a ₱25,000 residual value.
 A building was purchased on January 3, 2011, for ₱3,000,000. The building
was expected to have a useful life for 20 years with no residual value. The
straight-line depreciation method was used. On January 1, 2014, a change
was made to the sum-of-the-year’s-digits method of depreciation. No change
was made to the estimated useful life and residual value of the building.

6. The adjusting entry on January 4, 2014, relative to machine X should include

credit to retained earnings of?

7. What is the carrying value of machine Y on January 1, 2014?

8. What is the depreciation expense on machine Y for 2014?

9. What is the book value of the building at December 31, 2014?

10. What is the book value of the building on December 31, 2014?

Problem 3
You were engaged for the first time audit of the financial statements of Frank Corp.,
as of and for the period ended December 31, 2016. The company, which started
operations at the beginning of is in the business of textile distribution. Your
examination of the company’s books revealed the following:

a. The company reported net income amounting to P568,200, P814,900 and

P625,300 for 2014, 2015 and 2016 respectively

b. The following accruals and deferrals were consistently omitted at the end of
each year:
2014 2015 2016
Accrued utilities expense 5,000 9,000 2,000
Prepaid rent expense 2,500 1,200 1,600
Accrued salaries expense 9,000 2,000 1,500

c. The following deliveries were made to customers at each year-end, but were
recorded as sales only upon cash collection the following year. All sales were
made FOB Shipping Point and the related inventories were excluded from the
physical count conducted every December 31:
2014 2015 2016
Sales Price 25,000 20,000 34,000
Cost of goods 15,000 12,000 20,400

d. The following goods were received from suppliers as of each year-end, but
were recorded as purchases only upon cash payment the following year. All
purchases were made FOB Destination and the related inventories were
included in the physical count since they were already on hand as of the count
date.
2014 2015 2016
Purchase Price 25,000 22,000 24,000

e. You discovered that minor repairs done company’s warehouse costing

P112,500 at the beginning if 2015 was charged to the warehouse account and
was depreciated over the remaining life of the warehouse which was 9 years.

11. What is the adjusted net income for 2014?

12. What is the adjusted net income for 2015?

13. What is the adjusted net income for 2016?

14. What is the retroactive adjustment to the retained earnings beginning 2016?

15. What is the effect of the errors to the 2016 working capital?
Problem 4

You were assigned to audit for the first time the financial statements of Cosmic Girls
Inc. as of and for the year ended December 31, 2014. Cosmic Girls Inc. is a
merchandiser of korean cosmetic products and has started operations in early 2012.
No audit has been made on its financial statements from its inception. The following
was a result of your audit investigation:

The retained earnings general ledger entries from 2012 to current year appears
below:

12/31/12 Net income 600,000

7/01/13 Land @ fair value donated by a 400,000
stockholder
12/31/13 Net Income 750,000

4/02/14 Loss on inventory due to fire 50,000

12/31/14 Net Income 300,000

Balance 2,000,000

Audit notes:

a. The following were omitted at each year end:

2012 2013 2014

Accrued operating expenses 90,000 110,000 98,000
Accrued rental income 40,000 45,000 50,000
Prepaid advertising expense 20,000 30,000 35,000

b. The following equipment acquisitions were erroneously charged to maintenance

expense each year. It is the company policy to depreciate its equipment using
straight line method for 5 years. Moreover, fully years depreciation is charged on
the year of acquisition, none on the year of disposal.

Equipment acquisitions charged to repairs and maintenance expense:

2012 - 400,000 2014 - 550,000

c. Cash dividends declared and paid for each year charged to other operating
expenses:

2012 - 100,000 2013 - 150,000 2014 - 200,000

16. Correct Net Income for 2012

17. Correct Net Income for 2014

18. Retroactive adjustment to Retained Earnings beginning balance in 2014.

19. Adjusted Retained Earnings at the end of 2014.

20. Effect of errors to the 2014 Working capital.

Solutions
Multiple Choice Questions

Problem 1

1. B

a. Unadjusted profit P 1,400,000

b. Prepaid insurance 20,000
c. Accrued wages (25,000)
d. Unearned rent (30,000)
e. Interest 50,000
receivable
Adjusted profit P 1,415,000

Problem 2

2. B
3. C
4. A

Adjustments to Net RE
Income
2009 2010 12/31/2010
a. Salaries payable 2009 (873,600) 873,600
Salaries payable 2010 (780,000) (780,000)
b. Interest receivable 2009 259,200 (259,200)
Interest receivable 2010 213,000 213,000
c. Prepaid insurance 2009 384,000 (384,000)
Prepaid insurance 2010 307,800 307,800
d. Advances from customers (470,400) 470,400
2009
Advances from customers (561,000) (561,000)
2010
e. Machinery 2009 564,000 564,000
 (28,200) (56,400) (84,600)
Machinery 2010 522,000 522,000
(26,100) (26,100)
(Over)/Under P (165,000) P 320,100 P 155,100

Problem 3

5. A
6. B

2013 2014
a. Reported net income P 145,000 P 185,000
b. Unearned rent (6,500) 6,500
c. Unrecorded salary accruals:
December 31, 2012 5,500
December 31, 2013 (7,500) 7,500
December 31, 2014 (4,700)
d. Supplies on hand not
recognized
December 31, 2012 (6,500)
December 31, 2013 3,700 (3,700)
December 31, 2014 7,100
Corrected net income P 133,700 P 197,700

Problem 4

7. A

Reported net income 250,000

a. Understated inventory 31,000
b. Accrued and prepaid expense 2,000
c. Unrecorded sales 5,000
d. Unrecorded purchases (30,000)
e. Depreciation 2014 (5,000)
f. Proceeds recorded as sales (10,000)
g. Loss on sale of machinery (15,000)
Corrected net income P 228,000

Problem 5

8. A
9. D
10. C

2014 Net Income WC 12/31/2014 RE 12/31/2014

a. Inventory under 2013 (48,000)
b. Inventory over 2014 (40,500) (40,500) (40,500)
c. Depreciation under (11,500)
2013
d. Prepaid insurance (110,000) 110,000 110,000
e. Unrecorded sale of 75,000 75,0000 75,000
machine
(Over)/Under P (123,500) P 144,500 P 133,000

Problem 6

11. A
Solution:
Equipment P 600,000
Depreciation – 2012 (120,000)
Depreciation – 2013 (120,000)
RE, 1/1/14 360,000

Problem 7

12. C
13. A

2013 2014
a. Pretax income P 505,000 P 387,000
b. Sales revenue erroneously recognized (191,000) 191,000
in 2013
c. Understatement of 2013 ending 43,200 (43,200)
inventory
d. Understatement of bond interest (7,250) (7,758)
expense(1)
e. Ordinary repairs erroneously (42,500) (47,000)
capitalized
f. Overstatement of depreciation(2) 4,250 8,950
Corrected pretax income P 311,700 P 488,992
(1)
Book Value Nominal Effective Discount
Year of Bonds Interest Interest Amortization
2013 P1,175,000 P75,000 P82,250 P7,250
2014 1,182,250 75,000 82,758 7,758

(2) Overstatement of depreciation

2013 (P42,500 ÷ 10) P4,250

2014 (P42,500 ÷ 10) P4,250

 (P47,000 ÷ 10) 4,700 P8,950

Problem 8

14. B
15. D

Adjustments to Liabilities
Net Income
Unadjusted profit P 6,500,000
Unrecorded purchase (1,000,000) 1,000,000
Ending inventory 1,500,000
Omitted accrued (500,000) 500,000
expense
Omitted unearned (200,000) 200,000
income
Omitted prepayment 100,000
(Over)/Under P 6,400,000 P 1,700,000

Problem 9

16. A
17. B
18. C

2014 2015 2016

1. Omissions
a. Accrued utilities expense (5,000) 5,000
(7,000) 7,000
b. Accrued interest income 2,000 (2,000)
4,000 (4,000)
3,000
c. Prepaid rent expense 2,000 (2,000)
1,000
d. Unearned royalty income (8,000) 8,000
(3,000)
2. Delivery of merchandise 5,000 (5,000)
10,000
3. Receipt of merchandise (6,000) 6,000
(3,000)
4. Cash received (3,000) 3,000
(5,000)
5. Payments to suppliers 2,000 (2,000)
1,000
6. Overstatement in year-end (9,000) 9,000
inventories (7,000)
7. Understatement year-end 4,000 (4,000)
inventories
8. Organization cost (50,000)
10,000 10,000 10,000
9. Major repairs 35,000
(3,500) (70,000)
40,000
(4,000)
Adjustment (58,000) 58,500 31,000
Unadjusted Profit 345,000 586,000 460,000
Adjusted Profit P 287,000 P 644,500 P 491,000

Problem 10

19. B
20. D
21. A
22. A

Net Income (Loss) RE, End WC

2014 2015 2016 2016 2016
Unadjusted Balances (117,400) 214,300 421,70 1,571,500
0
a. Unearned rent income (22,500) 22,500
2015
b. Salaries Payable 2014 (5,500) 5,500
Salaries Payable 2015 (3,600) 3,600
Salaries Payable 2016 (9,900) (9,900) (9,900)
Unused supplies 2014 5,400 (5,400)
Unused supplies 2015 9,000 (9,000)
Unused supplies 2016 6,100 6,100 6,100
Acc. Royalty income 4,000 (4,000)
2014
Acc. Royalty income 7,900 (7,900)
2015
Acc. Royalty income 5,400 5,400 5,400
2016
c. Sales/AR 2014 28,000 (28,000)
Sales/AR 2015 30,000 (30,000
)
Sales/AR 2016 22,000 22,000 22,000
Inventory over 2014 (15,400) 15,400
Inventory over 2015 (17,400) 17,400
Inventory over 2016 (13,200 (13,200) (13,200)
)
d. Repairs expense over 55,000 55,000
2014
Dep Expense 2014 - (5,000) (5,000) (5,000) (15,000)
2016
e. 2016 Dividend (120,000) (120,000)
declaration
f. Excess over par from (120,000)
shares issued
FMV of land donated (480,000)
by major stockholder
Loss on sale of an (22,500
equipment )
P P196,20 P901,90 P
(110,900) 0 0 (109,600)

Problem 11

23. C
24. D
25. A

2014 Net WC RE
Income 12/31/2014 12/31/2014
a. Omitted prepayments
2013 (256,000)
2014 205,200 205,200 205,200
b. Salaries and wages
2013 582,400
2014 (520,000) (520,000) (520,000)
c. Accrued interest income
2013 (172,800)
2014 142,000 142,000 142,000
d. Advances from customers
2013 313,600
2014 (374,000) (374,000) (374,000)
e. Capital expenditure charged as
expense 376,000
2013 348,000 348,000
2014
f. Depreciation on capital expenditure
2013 (37,600) (56,400)
2014 (17,400) (17,400)
(Over)/Under P 213,400 P (546,800) P 103,400

Problem 12

26. D
27. B
28. D
29. A
30. B

2012 2013 2014 RE 1/1/14 WC

12/31/14
a. Reported net P 100,000 P 145,000 P 185,000
income
b. Unearned rent (6,500) (6,500)
income
c. Salaries payable
2011 2,500
2012 (5,500) 5,500
2013 (7,500) 7,500 (7,500)
2014 (4,700) (4,700)
d. Unused supplies
2011 (3,500)
2012 6,500 (6,500)
2013 3,700 (3,700) 3,700
2014 7,100 7,100
e. Repairs expense 220,000 220,000
f. Depreciation (20,000) (20,000) (20,000) (40,000)
expense
Corrected net income P P 120,200 P P P
300,000 164,700 176,200 (4,100)

Depreciation Expense:

a. The expired life of the asset was 5 years, thus on 12/31/14 the expired life is
(5+3) 8 years. Depreciation per books is computed as: Accumulated depreciation /
expired life

b. The major repairs cost should have been capitalized on 1/1/12 and depreciated
over the remaining useful life of the related asset. Total life of asset is 16 years
computed as (Total cost / annual depreciation per books) 500,000 / 31,250 = 16
years.

Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years

Long Problems

Problem 1

1. 700,000
2. (1,150,000)
3. 700,000
4. (450,000)
5. (300,000)

Adjustments to NI Retained Earnings Working

Capital
2009 2010 1/1/2010 12/31/2010 12/31/2010
a. Ending 800,000 (800,000) 800,000 - -
inventory –
2009
b. Ending - (400,000) - (400,000) (400,000)
inventory –
2010
c. Depreciation (150,000) - (150,000) - -
– 2009
d. Insurance 50,000 (50,000) 50,000 - -
expense
e. Sale of - 100,000 - 100,000 100,000
equipment
(Over)/Under P P P P P (300,000)
700,000 (1,150,000) 700,000 (450,000)

Problem 2

6. 100,000

Machinery – X 150,000
Accumula6ted depreciation – Machinery
(P150,000 x 5*/15)
50,000
Retained earnings (P150,000 - P50,000)
100,000
*Jan. 1, 2009 – Dec. 31, 2013

7. 350,000

Cost of machine Y P525,000

Less: Accumulated depreciation, Dec. 31, 2013
(P525,000 x 4/12)
175,000
Carrying value, Dec. 31, 2013 P
350,000

8. 81,250

Carrying value, Dec. 31, 2013 (see no. 2) P 350,000

Less: Salvage value 25,000
Remaining depreciable cost 325,000
Divide by revised remaining life ÷ 4 yrs
 Depreciation for 2014 P 81,250

9. 2,550,000

Cost of building P 3,000,000

Less: Accumulated depreciation, Dec. 31, 2013
(P3,000,000 x 3/20) 450,000
Book value of building, Dec. 31, 2013 P 2,550,000

10. 2,266,667

Book value of building, Dec. 31, 2013 (see no. 4) P2,550,000

Less: Depreciation for 2014
(P2,550,000 x 17/153*) 283,333
Book value of building, Dec. 31, 2014 P2,266,667

L+1 17+ 1
SYD = L x = 17 x
=¿ 17 x 9 = 153
2 2

Problem 3

11. 556,700
12. 714,600
13. 657,700
14. (118,800)
15. 8,100

Net Income RE, beg. WC

2014 2015 2016 2016 2016
Unadjusted Balances 568,200 814,900 625,300
a. Accrued Utilities Exp. (5,000) 5,000
2014
Accrued Utilities Exp. (9,000) 9,000 (9,000)
2015
Accrued Utilities Exp. (2,000) (2,000)
2016
Prepaid Rent Expense 2,500 (2,500)
2014
Prepaid Rent Expense 1,200 (1,200) 1,200
2015
Prepaid Rent Expense 1,600 1,600
2016
Accrued Salaries Exp. (9,000) 9,000
2014
Accrued Salaries Exp. (2,000) 2,000 (2,000)
2015
 Accrued Salaries Exp. (1,500) (1,500)
2016
b. Sales/AR 2014 25,000 (25,000)
Sales/AR 2015 20,000 (20,000) 20,000
Sales/AR 2016 34,000 34,000
c. Purchases/AP 2014 (25,000) 25,000
Purchases/AP 2015 (22,000) 22,000 (22,000)
Purchases/AP 2016 (24,000) (24,000
)
d. Repairs Expense 2015 (112,500) (112,500)
Depreciation Expense 12,500 12,500
2015
Depreciation Expense 12,500
2016
(Over)/Under P P
(118,800) 8,100
Adjusted balance P P P
556,700 714,600 657,700

Problem 4

16. 990,000
17. 832,000
18. (195,000)
19. 2,187,000
20. (13,000)

2012 NI 2014 NI RE RE WC 12/31/2014

1/1/2014 12/31/2014
a. Unadjusted 600,000 300,000 2,000,000
balance
b. Accrued
expense (90,000)
2012 110,000 (110,000)
2013 (98,000) (98,000) (98,000)
2014
c. Accrued
income 40,000
2012 (45,000) 45,000
2013 50,000 50,000 50,000
2014
d. Prepaid
expense 20,000
2012 (30,000) 30,000
2013 35,000 35,000 35,000
2014
e. Equipment
charged to
expense 400,000 400,000 400,000
2012 550,000 550,000
2014
f. Depreciation
expense
2012 (80,000) (80,000) (160,000) (240,000)
2014 (110,000) (110,000)
g. Cash dividends
charged to
expense 100,000
2012 200,000
2013
2014
h. Land donated (400,000) (400,000)
by stockholder
(APIC)
i. Loss on (50,000)
inventory
(Over)/Under P P 2.187,000 P (13,000)
(195,000)
Adjusted balance P P 832,000
990,000