CASE 1: MARIKINA CORPORATION

You discovered the following errors in connection with your examination of the financial statement of Mar

a. Purchase of merchandise on account on December 28, 2020 amounting to P120,000 was not recorded un
2021. The merchandise was properly included in the ending inventory in 2020.

b. Sale of merchandise on account on December 31, 2020 amounting to P180,000 was not recorded until it
31, 2021. The merchandise was not included in its 2020 ending inventory. Title transfer to buyer when chip
c. On December 31, 2021, footings and extensions on their inventory balance was overstated by P50,000.
d. The following were extracted from the financial statement of Marikina Corporation:

2020 2021
Net income 510,000.00 480,000.00
Working Capital 360,000.00 520,000.00
RE, end of year 400,000.00 650,000.00

Determine the following as a result of your audit:

1. Net income in 2020
2. Working capital, end of 2020
3. Retained earnings, end of 2020
4. Net income in 2021
5. Working capital, end of 2021
6. Retained earnings, end of 2021
 Answers:

nancial statement of Marikina Corporation: 2020

NI
,000 was not recorded until it was paid in January 5, Unadjusted 510,000
a. (120,000)
b. 180,000
was not recorded until it was collected in January c. -
ansfer to buyer when chipped on Deceber 2020. Adjusted balances 570,000
overstated by P50,000.
 2020 2021
WC RE NI WC RE
360,000 400,000 480,000 520,000 650,000
(120,000) (120,000) 120,000 - -
180,000 180,000 (180,000) - -
- - (50,000) (50,000) (50,000)
420,000 460,000 370,000 470,000 600,000
Prepare the audit adjusting entries assuming that these errors were discovered in the course of your
examination of the 2021 financial statements.

1.
Failed to accrue wages, P160,000 at the end of 2020. Wages expenses was charged when paid in 2021
2.
Accrued interest income of P48,000 in 2019 was recorded only when collected in January 2020.
3. An insurance premium covering three years starting April 1, 2020 was paid on March 31, 2020. All of
the P60,000 premium had been charged to insurance expense in 2020. No adjustments were made in
2020 and 2021.
4. Failed to record P25,000 and P28,000 unused office supplies at December 31, 2020 and 2021,
respectively. Cash expenditures of P45,000 and P52,000 were charged to the office supplies expense
account during the year 2020 and 2021, respectively.
5. Research and development costs of P120,000 were incurred early in 2020. They were capitalized and
amortized over a three-year period. Amortization was recorded in 2020 and 2021. None of the
development costs meet the criteria for capitalization.
6. On May 1, 2020, the company received P120,000 cash from customer for services the company to
perform evenly over a three-year period. Full amount was recorded as revenue in 2020 and no
adjustments were taken up at December 31, 2020 and 2021.
7. Unearned rent of P36,000 was not recorded at the end of 2020.
8. A capital expenditure of P1,500,000 at January 1, 2019 for office equipment (useful life, 5 years) was
erroneously charged to maintenance expense.
d in the course of your Answers:

1. Retained Earnings
Wages Expense
s charged when paid in 2021.
2. Interest Income
ected in January 2020. Retained Earnings
id on March 31, 2020. All of
adjustments were made in 3. Insurance Expense
Prepaid Insurance
r 31, 2020 and 2021, Retained Earnings
the office supplies expense
4. Supplies Expense
. They were capitalized and Retained Earnings
nd 2021. None of the
Unused Supplies
services the company to Supplies Expense
enue in 2020 and no
5. Retained Earnings
Accumulated Amortization – Development Cost
ent (useful life, 5 years) was Capitalized Development Cost
Amortization Expense – Development Cost

6. Retained Earnings
Service Revenue
Unearned Service Revenue

7. Retained Earnings
Rent Revenue

8. Office Equipment
Depreciation Expense - Equipment
Accumulated Depreciation
Retained Earnings
 160,000
160,000

48,000
48,000

20,000
20,000
40,000

25,000
25,000

28,000
28,000

80,000
ization – Development Cost 80,000
d Development Cost 120,000
ion Expense – Development Cost 40,000

80,000
40,000
Service Revenue 40,000

36,000
36,000

1,500,000
e - Equipment 300,000
ted Depreciation 900,000
900,000
Yuri, a CPA was engaged by Makati Inc. in 2021 to examine its books and records and to propose any adju
process, Yuri noted the following on its working paper:

a. Makati Inc. had failed to record sales commissions payable of P10,800 and P3,300 at the end of 2020

b. Makati Inc. also failed to recognize supplies on hand of P2,550 and P5,160 at the end of 2020 and 202

c. Improvements in machinery and equipment of P32,400 had been debited to expense account at the end
the capacity of the machinery and equipment and estimated to have 12-year life. The company's policy
month using straight line method.

d.
A physical count of inventory was made at the end of 2019 and 2020. By the audit procedures perform

Date Per Book Per Audit (Count)

12/31/2019 725,900.00 735,500.00
12/31/2020 623,450.00 637,700.00

e.
Dividends have been declared on December 20 in 2019 and 2020 but had not been entered in the book

f. The retained earnings account appeared as shown below on the date Yuri began the audit.

RETAINED EARNINGS
Date Items Debit Credit
2019
31-Jan Balance - -
31-Dec Net income - 120,000.00
2020
10-Jan Dividends paid 46,500.00 -
6-Mar Issued shares - excess par - 63,000.00
31-Dec Net income - 62,000.00
2021
10-Jan Dividends paid 46,500.00 -
31-Dec Net loss 17,200.00 -

Determine the following as a result of your audit:

1. The 2019 corrected income
2. The 2020 adjusted net income
3. The 2021 adjusted net loss
4. The adjusted balance of retained earnings as of December 31, 2021
 and to propose any adjustments if necessary. During the audit Answers:

,300 at the end of 2020 and 2021, respectively.

the end of 2020 and 2021, respectively.

pense account at the end of April 2018. Improvements made increase

e. The company's policy is to compute depreciation to the nearest

udit procedures performed the following were noted:

been entered in the books until payment was made.

n the audit.

Balance

195,000.00
315,000.00

268,500.00
331,500.00
393,500.00

347,000.00
329,800.00
 2019 NI 2020 NI 2021 NL
Unadjusted 120,000 62,000 (17,200)
Commissions payable (10,800) 10,800
(3,300)
Supplied on hand 2,550 (2,550)
5,160
Machine charge to expense (2,700) (2,700) (2,700)
Under inventory 9,600 (9,600)
Under inventory 14,250 (14,250)
Adjusted balances 126,900 55,700 (24,040)

Retained earnings, 2019 adjusted*

(195,000 + 30,600) 225,600
Net income 2019 126,900
Dividends declared (46,500)
RE, 2019 306,000
Net income 2020 55,700
Dividends declared (46,500)
RE, 2020 315,200
Net loss 2021 (24,040)
RE, 2021 291,160

** add back the machine cost expense in 2018 less depreciation

expense for 8 months, 32,400 / 12 = 2,600 x 8/12 = 1,800.
32,400 - 1,800 = 30,600 amount added to RE in 2019.
The Vitality Company showed pre-tax income of P2,500,000 for the year ended December 31, 2021. On yo
transactions of the Company, you discovered the following errors:

a. P1,000,000 worth of merchandise was purchased in 2021 and included in the ending inventory. Howev
only in 2022.

b. A merchandise shipment valued at P1,500,000 was properly recorded as purchases at year end. The me
omitted from the physical count, since it has not arrived by December 31, 2021.

c. Value added tax for the fourth quarter of 2021, amounting to P500,000, was included in the Sales acco

d. Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2021. T
revenue upon receipt.

e. Rent paid on building covering the period from July 1, 2021 to July 1, 2022, amounting to P1,200,000
on July 1, 2021. The company did not make any adjustment at the end of year.

Requirements:
1. Corrected pre-tax income in 2021
2. Net effect of the foregoing errors on the total assets at December 31, 2021
3. Total understatement of the total liabilities at December 31, 2021
ed December 31, 2021. On your year-end verification of the Answers:

1. 2,500,000 – 1,000,000 + 1,50

the ending inventory. However, the purchase was recorded
2. 1,500,000 + 600,000 = 2,100,

purchases at year end. The merchandise was inadvertently 3. 1,000,000 + 500,000 + 200,00
2021.

as included in the Sales account.

ved on November 1, 2021. The entire amount was reported as

22, amounting to P1,200,000, was paid and recorded as expense

year.
2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000

1,500,000 + 600,000 = 2,100,000

1,000,000 + 500,000 + 200,000 = 1,700,000