Testbank Correction of Errors
Testbank Correction of Errors
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:
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%)
4. What is the net effect of the errors on the balance of the company’s retained
earnings at Dece,ber 31, 2010?
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.
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.
a. P 133,700 c. P 146,700
b. P 144,200 d. P 139,300
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:
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.
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
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?
9. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2014?
10. What is the total effect of the errors on the balance of Samoa’s retained
earnings at December 31, 2014?
Problem 6
11. What is the effect of the error on the retained earnings at January 1, 2014?
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.
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:
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%.
a. P 303,200 c. P 311,700
b. P 225,300 d. P 307,450
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:
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?
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%
a. 287,000 c. 491,000
b. 644,500 d. 691,500
a. 287,000 c. 491,000
b. 644,500 d. 691,500
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.
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
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)
a. 218,700 c. 191,200
b. 198,200 d. 196,200
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?
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?
24. What is the effect of the errors on the company's working capital as of
December 31, 2014?
25. If remained unadjusted, what will be the effect of the errors to the company's
December 31, 2014 accumulated profits?
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.
c. The following unused office supplies were omitted in the accounting records:
a. 80,000 c. 240,000
b. 234,000 d. 300,000
a. 113,700 c. 126,700
b. 120,200 d. 139,300
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:
30. The effect of the above errors on 2014 working capital is:
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:
Problem 2
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.
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:
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
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:
Balance 2,000,000
Audit notes:
c. Cash dividends declared and paid for each year charged to other operating
expenses:
Solutions
Multiple Choice Questions
Problem 1
1. B
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
Problem 5
8. A
9. D
10. C
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
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
Problem 10
19. B
20. D
21. A
22. A
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
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.
Long Problems
Problem 1
1. 700,000
2. (1,150,000)
3. 700,000
4. (450,000)
5. (300,000)
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
8. 81,250
9. 2,550,000
10. 2,266,667
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
Problem 4
16. 990,000
17. 832,000
18. (195,000)
19. 2,187,000
20. (13,000)