CHAPTER 2 – Accounting for Correction of Errors Exercises
1. On November 1, 2006, Rosete Company Company paid paid P10,800 to renew its insurance insurance policy policy or ! years. On "ecember !1, 2006, 2006, Rosete#s Rosete#s unad$usted trial trial valance s%owed s%owed a balance balance o P2&0 or prepaid insurance insurance and P1!,2!0 P1!,2!0 or insurance insurance e'pense. (%at amounts s%ould s%ould be reported or prepaid insurance insurance and insurance e'pense in Rosete#s "ecember !1, 2006 inancial statements) Prepaid Insurance Insurance Expense a. P *,*00 P !,600 b. P 10,200 P !,600 c. P 10,200 P !,!00 d. P 10,200 P !,0!0 2. +n analysis analysis o Palmes Corpora Corporation# tion#s s unad$usted unad$usted prepaid prepaid e'pense account account at "ecember "ecember !1, 2006 revealed t%e ollowin•
• •
+n openin balance balance at P6,000 or Palmes Palmes compre%ensive compre%ensive insurance insurance policy. Palmes %ad paid an annual premium o P12,000 on uly 1, 200/. + P12,800 annual insurance premium payment made uly 1, 2006. + P8,0 P8,000 00 adva advanc nce e rent rental al paym paymen entt or or a ware ware%o %ous use e Palm Palmes es leas leased ed or or 1 year year beinnin anuary 1, 2006.
n its "ecember !1, 2006 balance s%eet, w%at amount s%ould Palmes report as prepaid e'penses) a. P 20,00 b. P 1,00 c. P 8,000 d. P 6,00 !. On October October 1, 2006, 2006, a compan company y sold service services s to a custome customerr and accepte accepted d a note note in e'c%ane e'c%ane wit% a P120,000 P120,000 ace value value and an interest interest rate o 10. 3%e note re4uires re4uires t%at bot% t%e principal and interest be paid at t%e maturity date, "ecember 1, 200&. 3%e company#s company#s accountin period is t%e calendar year year.. (%at ad$ustin entry 5related to t%is note will be re4uired at "ecember !1, 2006 on t%e company#s boo7s) a. "eerred interest in income !,000 nterest receivable b. nterest income !,000 nterest receivable c. nterest receivable !,000 "eerred interest income d. nterest receivable !,000 nterest income
!,000 !,000 !,000 !,000
. (%at is t%e t%e purpose purpose o t%e t%e ollowin ollowin entry) entry) upplies '''' upplies e'pense
''''
a. 3o reconi9e supplies supplies used, i purc%ases o supplies are recorded recorded in supplies. supplies.
1
b. 3o reconi reconi9e 9e supplies supplies on %and, %and, i purc%a purc%ases ses o suppl supplies ies are recorded recorded in suppli supplies es e'pense. c. 3o record record t%e purc%a purc%ase se o supplies supplies durin durin or at t%e t%e end o t%e period. period. d. 3o close close t%e e'pense e'pense accou account nt or supplie supplies s at t%e end o t%e t%e period. period. /. On "ecember "ecember !1, !1, earned earned but unpaid unpaid waes waes amoun amounted ted to P1/,000 P1/,000.. (%at rever reversin sin entry entry could be made on anuary 1) a. (aes e'pense 1/,000 (aes payable 1/,000 b. Prepaid e'pense 1/,000 (aes e'pense 1/,000 c. (aes e'pense 1/,000 Prepaid waes 1/,000 d. (aes payable 1/,000 (aes e'pense 1/,000 6. + !:year !:year insurance insurance policy was was purc%ased purc%ased on October1 October1 or P6,000, and and prepaid insurance insurance was debited. debited. +ssumin +ssumin a "ecember "ecember !1 year:end, year:end, w%at is t%e reversin reversin entry entry at t%e beinnin o t%e ne't period) a. None None is is re4u re4uir ired ed.. b. Cas% 6,000 Prepaid insurance 6,000 c. Pr Prepaid insurance /,/00 nsurance e'pense /,/00 d. nsurance e'pense /00 Prepaid insurance /00 &. + consultin consultin irm started started and complet completed ed a pro$ect pro$ect or or a client client in "ecem "ecember ber 2006. 2006. 3%e pro$ect %as not been recorded on t%e consultin irm#s boo7s, and t%e irm will not receive payment payment rom t%e client until ;ebruary ;ebruary 200&. 3%e ad$ustin entry t%at t%at s%ould be made on t%e boo7s o t%e consultin irm on "ecember !1, 2006, t%e last day o t%e irm#s iscal year, is a. Cas% in transit ''' Consultin revenue ''' b. Consultin revenue receivable ''' Consultin revenue ''' c.
ntry. b.
2
*. +ter +ter a succes successu sull drive drive aimed at member members s o a speci speciic ic natio national nal associa associatio tion, n, Online Online Company received a total o P180,000 or !:year subscriptions beinnin +pril 1, 2006, and recorded t%is amount amount in t%e unearned unearned revenue account. account. +ssumin Online records records ad$ustment only at t%e end o t%e calendar year, t%e ad$ustin entry re4uired to relect t%e proper balances in t%e accounts at "ecember !1, 2006 is to a. "ebit subscri subscription ption revenue revenue or P1!/,000 P1!/,000 and credit credit unearned unearned revenue revenue or P1!/,000. P1!/,000. b. "ebit unearn unearned ed revenue revenue or or P1!/,000 P1!/,000 and and credit credit subscri subscription ption reven revenue ue or P1!/,00 P1!/,000. 0. c. "ebit subscri subscription ption revenue revenue or P/,000 P/,000 and and credit unearne unearned d revenue revenue or P/,000. P/,000. d. "ebit unearned unearned revenue revenue or P/,000 P/,000 and credit credit subscriptio subscription n revenue revenue or P/,000. 10. ay Corporatio Corporation n renewed renewed an insurance insurance policy or !:years !:years beinnin beinnin uly 1, 2006 and record recorded ed t%e P81,000 P81,000 premium premium in t%e prepaid prepaid insura insurance nce account accounts. s. 3%e P81,000 P81,000 premium represents an increase o P2!,00 rom t%e P/&,600 premium c%ared ! years ao. +ssumin ay?# ay?# records its insurance insurance ad$ustments ad$ustments only at t%e t%e end o t%e calendar calendar year year, t%e ad$ust ad$ustin in entry entry re4uir re4uired ed to relec relectt t%e proper proper balan balances ces in t%e insur insuran ance ce accounts at "ecember !1, 2006, ay#s year:end year:end is to a. "ebit insura insurance nce e'pense e'pense or P1!,/00 P1!,/00 and credit credit prepaid prepaid insuranc insurance e or P1!,/00. P1!,/00. b. "ebit prepaid prepaid insuran insurance ce or P1!,/00 P1!,/00 and credit insura insurance nce e'pense e'pense or P1!,/00. P1!,/00. c. "ebit insur insuranc ance e e'pense e'pense or or P6&,/00 P6&,/00 and and credit credit prepaid prepaid insura insurance nce or or P6&,/00. P6&,/00. d. "ebit insura insurance nce e'pense e'pense or P2!,100 P2!,100 and credit prepaid prepaid insuran insurance ce or P2!,100. P2!,100. 11. 3%e 2006 inancia inanciall statement statements s o @ers%ey @ers%ey Company Company reported reported net income income or t%e year year ended "ecember !1, 2006 o 2 million. On uly 1, 200&, subse4uent to t%e issuance o t%e 2006 inancial statements, @ers%ey c%aned rom an accountin principle t%at is not ene enera rall lly y acce accept pted ed to one one t%at t%at is ene enera rall lly y acce accept pted ed.. t%e t%e ene enera rall lly y acce accept pted ed accountin principle %ad been used in 2006, net income or t%e year ended "ecember !1, 2006 2006 woul would d %ave %ave been been decr decrea ease sed d by 1 mill millio ion. n. On +u +uu ust st 1, 200& 200&,, @ers @ers%e %ey y discovered a mat%ematical error relatin to its 2006 inancial statements. t%is error %ad been discovered in 2006, net income or t%e year ended would %ave been increased by P/00,000. (%at amount, i any, s%ould be included in net income or t%e year ended "ecember !1, 200& because o t%e items noted above) a. P 0 c. P /00,000 increase b. P /00,000 decrease d. P 1,000,000 decrease 12. >dcelle >dcelle Company Company reported reported a retained earnins earnins balance o P00,000 P00,000 at "ecember "ecember !1, 200/. n +uust 2006, >dcelle determined t%at insurance premiums o P60,000 or t%e !:year period beinnin anuary 1, 200/ %ad been paid and ully e'pensed in 200/. >dcelle %as a !0 income ta' rate. (%at amount s%ould >dcelle report as ad$usted beinnin retained earnins in its 2006 statement o retained earnins) a. P 2,000 b. P 0,000 c. P 28,000 d. P 20,000 1!. Colasissi Colasissi Corporatio Corporation n ailed ailed to accrue warranty warranty costs o P/0,000 in its "ecember !1, 200/ 200/ inanc inancial ial statem statement ents. s. n additi addition, on, a c%ane c%ane rom rom strai strai%t %t:li :line ne to accel accelera erated ted depreciation made at t%e beinnin o 2006 resulted in a cumulative eect o P!0,000 on Colasi Colasiss ssi#s i#s retained retained earnin earnins. s. Aot Aot% % t%e P/0,00 P/0,000 0 and P!0,00 P!0,000 0 are are net o relate related d income ta'es. (%at amount s%ould Colasissi report as prior period ad$ustments in 2006)
3
a. P 0 b. P !0,000 c. P /0,000 Buestions 1 and 1/ are based on t%e ollowin inormation.
d. P 80,000
On October 1, 2006, uri Retailers sined a :mont%, 16 note payable to inance t%e purc%ase o %oliday merc%andise. +t t%at date, t%ere was no direct met%od o pricin t%e merc%andise, and t%e note#s mar7et rate o interest was 11. uri recorded t%e purc%ase at t%e note#s ace amount. +ll o t%e merc%andise was sold by "ecember 1, 2006. uri#s 2006 inancial statements reported interest payable and interest e'pense on t%e note or ! mont%s at 16. +ll amounts due on t%e note were paid ;ebruary 1, 200&. 1. uri#s 2006 cost o oods sold or t%e %oliday merc%andise was a. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value. b. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value plus 11 interest or 2 mont%s. c.
a. b. c. d.
12/31/06 Retained earnings es No es No
12/31/06 Interest payable es No No es
16. On "ecember !1, 2006, >'cel Corp. sold merc%andise or P&/,000 to ;ineale Co. 3%e terms o t%e sale were net !0, ;OA s%ippin point. 3%e merc%andise was s%ipped on "ecember !1, 2006 and arrived at ;ineale on anuary /, 200&. Aecause o a clerical error, t%e sale was not recorded until anuary 200&, and t%e merc%andise, sold at 2/ mar7up, was included in >'cel#s inventory at "ecember !1, 2006. +s a result, >'cel#s cost o oods sold or t%e year ended "ecember !1, 2006 was a.
P/6,000 /1,000 6,000
3%e entry on "ecember !1, 2006 to correct or t%ese omissions would include a a. Credit to wae e'pense or P6,000 b. "ebit to wae e'pense or P/1,000 c. "ebit to wae e'pense or P1!,000
4
d. Credit to retained earnins or P6,000 18. +n audit o ;unny Co. or 2006, its irst year o operations, detected t%e ollowin errors made at "ecember !1, 2006;ailed ;ailed ;ailed ;ailed
to to to to
accrue P/0,000 interest e'pense record depreciation e'pense on oice e4uipment o P80,000 amorti9e prepaid rent e'pense o P100,000 delay reconition o prepaid advertisin e'pense o P60,000
3%e net eect o t%ese errors was to overstate net income or 2006 by a. P 1!0,000 b. P 1&0,000 c. P 2!0,000 d. P 2*0,000 1*. (%ile preparin its 2006 inancial statements, ;alact Corp. discovered computational errors in its 200/ and 200 depreciation e'pense. 3%ese errors resulted in overstatement o eac% year#s income by P2/,000, net o income ta'es. 3%e ollowin amounts were reported in t%e previously issued inancial statements2005 2004 Retained earnins, 1E1 P &00,000 P /00,000 Net income 1/0,000 200,000 Retained earnins, 12E!1 P 8/0,000 P &00,000 ;alact#s 2006 net income is correctly reported at P180,000. (%ic% o t%e ollowin amounts s%ould be reported as prior:period ad$ustments and net income in ;alact#s 2006 and 200/ comparative inancial statements)
a. b. c. d.
Year 200/ 2006 200/ 2006 200/ 2006 200/ 2006
Prior period adust!ent : P 5/0,000 5/0,000 : 52/,000 : : :
"et inco!e P1/0,000 180,000 1/0,000 180,000 12/,000 180,000 12/,000 180,000
20. 3%e ollowin inormation appeared on Ali%t nc.#s "ecember !1 inancial statements2005 2006 +ssets P 1,000,000 P1,200,000 Fiabilities &/0,000 800,000 Contributed capital 120,000 120,000 "ividends paid 100,000 60,000 n preparin its 2006 inancial statements, Ali%t discovered t%at it %ad misplaced a decimal in calculatin depreciation or 200/. 3%is error overstated 200/ depreciation by P10,000. n addition, c%anin tec%noloy %ad siniicantly s%ortened t%e useul lie o Ali%t#s computers. Aased on t%is inormation, Ali%t determined t%at depreciation s%ould be P!0,000 %i%er in 2006 inancial statements. +ssumin t%at no correctin or ad$ustin entries %ave been made and inorin income ta'es, %ow muc% s%ould Ali%t report as 2006 net income) a. P 2!0,000 b. P 210,000 c. P 180,000 d. P 1&0,000
5
Buestions 21 and 22 are based on t%e ollowin inormation. +n audit o +nelina Company %as revealed t%e ollowin our errors t%at %ave occurred but %ave not been corrected• • • •
nventory at "ecember !1, 200/:P0,000, understated nventory at "ecember !1, 2006:P1/,000, overstated "epreciation or 200/:P&,000, understated +ccrued e'penses at "ecember !1, 2006:P10,000, understated
21. 3%e errors cause t%e reported net income or t%e year endin "ecember !1, 2006 to be a. Overstated by P&2,000 c.
6
d. P!0,000 understatement o asset and P!0,000 overstatement o owner#s e4uity. 2&. + cas% purc%ase o P/,200 was recorded as P2,/00. 3%e error %ad been discovered w%en nominal accounts were already closed to income summary, but not yet closed to t%e capital account. 3%e correctin entry will re4uire a a. P2,&00 debit to accounts receivable b. P2,&00 debit to purc%ases c. P2,&00 credit to purc%ases d. P2,&00 credit to accounts payable 28.
7
!/.3%e accrued interest on a 12, 60:day note o a customer dated "ecember 1, 2006 wit% a ace value o P100,000 was not ta7en up as o "ecember !1, 200. 3%e collection o t%e note, w%ic% matured on anuary !1, 200&, was recorded as Cas% 102,000 Notes receivable 100,000 nterest ncome 2,000 3%e error was discovered ater collection. 3%e correctin entry would re4uire a a. P2,000 debit to cas%. b. P2,000 debit to accrued interest receivable c. P1,000 debit to interest income d. P2,000 credit to interest income !6.+ return o merc%andise amountin to P,/00 w%ic% was previously purc%ased on account was recorded as +ccounts payable Purc%ases
/,00 /,00
t%e error %ad been discovered w%en t%e nominal accounts were still open, t%e correctin entry would re4uire a a. P*00 debit to purc%ase return b. P*00 debit to accounts payable c. P*00 credit to purc%ases d. P*00 credit to accounts payable
#ns$er% 1& c 2& a
3' d
4' b
5& d
6& a
(& b
)& d
*& d
10& d
11& d
12& c
13& c
14& a
15& d
16& b
1(& c
1)& b
1*& a
20& c
21& b
22& b
23& c
24& a
25& b
26& c
2(& b
2)& c
2*& b
30& d
31& d
32& b
33& b
34& d
35& c
36& d
8
Problem 1
3%e irst audit o t%e boo7s o Fu9on Company was made or t%e year ended "ecember !1, 2006. n e'aminin t%e boo7s, t%e auditor ound t%at certain items %ad been overloo7ed or incorrectly %andled in t%e last ! years. 3%ese items area. +t t%e beinnin o 200, t%e company purc%ased a mac%ine or P1,020,000 5salvae value o P102,000 t%at %ad a useul lie o 6 years. 3%e boo77eeper used strai%t:line depreciation, but ailed to deduct t%e salvae value in computin t%e depreciation base or t%e ! years. b. +t t%e end o 200/, t%e company ailed to accrue sales salaries o P*0,000. c. + ta' lawsuit t%at involved t%e year 200 was settled late in 2006. t was determined t%at t%e company owed an additional P1&0,000 in ta'es related to 200. 3%e company did not record a liability in 200 or 200/ because t%e possibility o loss was considered remote, and c%ared t%e P1&0,000 to a loss account in 2006. d. Fu9on Company purc%ased anot%er company early in 200 and recorded oodwill o P*00,000. Fu9on %ad not amorti9ed oodwill because its value %ad not diminis%ed. 3%e estimated economic lie o t%e oodwill is 20 years. e. n 2006, t%e company wrote o P1&,000 o inventory considered to be obsoleteG t%is loss was c%ared directly to Retained >arnins. .
ear:end waes payable o P6,800 were not recorded because t%e boo77eeper t%ou% t%at Ht%ey were immaterial.I
. nsurance or a 12:mont% period purc%ased on November 1 o t%is year was c%ared to insurance e'pense in t%e amount o P/,280 because Ht%e amount o t%e c%ec7 is about t%e same every year. +uestions 1. 3%e entry to record t%e ad$ustment o item HaI isa. +ccumulated depreciation !,000 Retained earnins "epreciation e'pense b. +ccumulated depreciation /1,000 Retained earnins "epreciation e'pense c. +ccumulated depreciation 1&,000 "epreciation e'pense d. +ccumulated depreciation 1&,000 Retained earnins 2. 3%e entry to record t%e ad$ustment o item HcIa. No ad$ustment. b. Retained earnins 1&0,000 >stimated liability c. Foss on damaes 1&0,000 >stimated liability
1&,000 1&,000 !,000 1&,000 1&,000 1&,000
1&0,000 1&0,000
9
d. Foss on damaes 1&0,000 Cas% 1&0,000 !. Net income o 200/ is overstated bya. P 60,00 b. P !18,00 c. P 10&,000
d. P &!,000
. Net income o 2006 is overstated bya. P !6&,000 b. P !12,000
d. P 6*,00
c. P 10!,00
Solution
a&
b& c& d& e& & g&
#ccu!ulated depreciation 51'000 ,epreciation expense -2006. Retained earnings -2004 2005. Retained earnings *0'000 alaries expense "o adust!ent "o adust!ent since no indication o i!pair!ent& oss on obsolete inentory 1(4'000 Retained earnings alaries expense 6')00 alaries payable Prepaid insurance 4'400 Insurance expense 2004 1('000
Ite! # Ite! Ite! Ite! , Ite! E Ite! 7 Ite! 8 "et Eect #ns$er% 1&
99999999999 1('000
2& #
3& ,
1('000 34'000 *0'000
1(4'000 6')00 4'400 2005 1('000 -*0'000.
2006 1('000 *0'000
9999999999 -(3'000
-1(4'000. -6')00. 4'400 -6*'400.
4& ,
Problem 2
+ CP+ is enaed by t%e ony Corporation in 2006 to e'amine t%e boo7s and records and to ma7e w%atever corrections are necessary. +n e'amination o t%e accounts discloses t%e ollowina. "ividends %ad been declared on "ecember 1/ in 200 and 200/ but %ad not been entered in t%e boo7s until paid. b. mprovements in buildin and e4uipment o P*,600 %ad been debited to e'pense at t%e end o +pril 200!. mprovements are estimated to %ave an 8:year lie. 3%e company uses t%e strai%t:line met%od in recordin depreciation and computes depreciation to t%e nearest mont%. c. 3%e p%ysical inventory o merc%andise %ad been understated by P!,000 at t%e end o 200 and by P,!00 at t%e end o 200/. d. 3%e merc%andise inventories at t%e end o 200/ and 2006 did not include merc%andise t%at was t%en in transit and to w%ic% t%e company %ad title. 3%is s%ipments o P!,800 and P/,/00 were recorded as purc%ases in anuary o 2006 and 200, respectively. e. 3%e company %ad ailed to record sales commissions payable o P2,100 and P1,&00 at t%e end o 200/ and 2006, respectively.
10
.
3%e company %ad ailed to reconi9ed supplies on %and o P1,200 and P2,/00 at t%e end o 200/ and 2006, respectively.
3%e Retained >arnins account s%owed t%e ollowin postins"ate 200 an 1 "ec !1 200/ an 10 =ar 6
2006
"ec!1 an 10 "ec !1
tem Aalance Net income or year "ividends paid toc7 sold J e'cess over par Net loss or year "ividend paid Net loss or year
"ebit
Credit 81,000 18,000
1/,000 !2,000 11,200 1/,000 12,00
+uestions% 1. Corrected net income o 200 a. P 1*,800 b. P 1/,600
c. P 1!,600
d. P 16,800
2. Corrected net loss o 200/ a. P 16,000 b. P 1,000
c. P 12,000
d. P 10,000
!. Corrected net loss o 2006 a. P 16,200 b. P 1/,800
c. P 1/,200
d. P 12,800
. +d$usted retained earnins at "ecember !1, 200 a. P 10*,200 b. P 106,00 c. P *,600
d. P 8/,000
/. +d$usted retained earnins at "ecember !1, 200/ a. P &1,200 b. P 6*,000 c. P 6&,600
d. P 6/,000
6. +d$usted retained earnins at "ecember !1, 2006 a. P /1,00 b. P *,800 c. P *,000
d. P 8,200
Solution
:nadusted "et inco!e/oss Ite! Ite!
2004 1)'000 -1'200. 3'000
Ite! , ; unrecorded ending in& unrecorded purc
-3')00.
Ite! E
-2'100.
Ite! 7 #dusted net inco!e/loss Retained earnings ; beg& Ite! # Ite! ; error in recording i!pro& unrecorded depreciation Retained earnings end #ns$er% 1& # 2& 3& #
2005 -11'200. -1'200. -3'000. 4'300 3')00
99999999999 1*')00 )1'000 -15'000. *'600 -)00. *4'600 4&
1'200 9999999999 -12'000. *4'600 -15'000. 999999999 6('600 5&
2006 -12'400. -1'200. -4'300. -3')00. 5'500 3')00 -5'500. 2'100 -1'(00. -1'200. 2'500 -16'200. 6('600
999999999999 51'400 6& #
11
Problem 3
+ partial trial balance o os% +le$andro Corporation is as ollows on "ecember !1, 2006"r.KKKK KKKKCr.KKKK upplies on %and P 1!,/00 +ccrued salaries and waes P &,/00 nterest receivable on investments 2/,/00 Prepaid insurance /0,000
+ p%ysical count o supplies on %and on "ecember !1, 2006, totaled P/,/00.
b.
3%rou% oversi%t, t%e +ccrued alaries and (aes account was not c%aned durin 2006. +ccrued salaries and waes on 12E!1E06 amounted to P22,000.
c.
3%e interest receivable on investments account was also let unc%aned durin 2006. +ccrued interest on investments amounts to P21,&/0 on 12E!1E06.
d.
3%e une'pired portions o t%e insurance policies totaled P!2/,000 as o "ecember !1, 2006.
e.
P10,000 was received on anuary 1, 200/, or t%e rent o a buildin or bot% 200/ and 2006. 3%e entire amount was credited to rental income.
.
"epreciation or t%e year was erroneously recorded as P2/,000 correct iure o P2/0,000.
.
+ urt%er review o depreciation calculations o prior year revealed t%at depreciation o P!6,000 was not recorded. t was decided t%at t%is oversi%t s%ould be corrected by a prior period ad$ustment.
+uestions 1. 3%e accrued salaries and waes at year:end isa. P 2*,/00 b. P22,000 c. P 1,/00
rat%er t%an t%e
d. P &,/00
2. @ow muc% is t%e ad$usted salaries and waes at year:end assumin t%at t%e balance o t%is account in t%e boo7 is P!/0,000) a. P !&*,/00 b. P !&2,000 c. P !6,/00 d. P !2,/00 !. Prepaid insurance at year:end isa. P /0,000 b. P !2/,000 . upplies on %and at year:end isa. P 1!,/00 b. P 8,000 /. "epreciation e'pense at year:end isa.
12
c. P 12/,000
d. P 0
c. P /,/00
d. P 2,/00
Solution
1&
upplies expense upplies on
)'000 )'000 ('500 ('500 22'000 22'000 25'500 25'500 21'(50 21'(50 125'000 125'000 (0'000 (0'000 225'000 225'000 36'000 36'000 4&
5& #
Problem 4
3%e beore ta' income or ;ran9ine Dome9 Co. or 200/ was P!0!,000 and P2!2,200 or 2006. @owever, t%e accountant noted t%at t%e ollowin errors %ad been made1. ales or 200/ included amounts o P11,600 w%ic% was received in cas% durin 200/, but or w%ic% t%e related products were delivered in 2006. 3itle did not pass to t%e purc%aser until 2006. 2. 3%e inventory on "ecember !1, 200/, was understated by P2/,*20. !. 3%e boo77eeper in recordin interest e'pense or bot% 200/ and 2006 on bonds payable made t%e ollowin entrynterest e'pense Cas%
1/,000 1/,000
3%e bonds %ave a ace value o P2/0,000 and pay a stated interest rate o 6. 3%ey were issued at a discount o P1/,000 on anuary 1, 200/, to yield an eective interest o &. 5+ssume t%at t%e eective yield met%od s%ould be used. . Ordinary repairs to e4uipment %ad been erroneously c%ared to t%e >4uipment account durin 200/ and 2006 or P2/,/00 and P!0,000, respectively. 3%e company applies a rate o 10 to t%e balance in t%e e4uipment account at t%e end o t%e year in its determination o depreciation c%ares. +uestions 1. 3%e ad$usted 200/ net income isa. P 22,120 b. P 1*,120
c. P 1*2,*20
d. P 18*,*20
2. 3%e ad$usted 2006 net income is-
13
a. P 2*,8&8
b. P 2*1,8&8
c. P 180,2&8
d. P 6/,6&8
!. 200/ net income is overstated bya. P 2!2,200 b. P 22*,200
c. P 11!,080
d. P
. a. b. c. d.
2006 net income is
/. 3%e correctin entry in item H1I isa. +ccounts receivable ales b. ales +ccounts receivable c. Retained earnins ales d. ales Retained earnins
11,600 11,600 11,600 11,600 11,600 11,600 11,600 11,600
Solution
1& 2& 3&
Retained earnings ales ost o sales -beg& in. Retained earnings Retained earnings Interest expense ,iscount on bonds payable Int& paid
2002 2003 4&
114'600 114'600 25'*20 25'*20 1'450 1'552 Int& exp&
15'000 15'000
Retained earnings Repairs expense E?uip!ent #ccu!ulated depreciation Retained earnings ,epreciation expense #ccu!ulated depreciation ,epreciation expense
25'500 30'000 55'500 5'100 2'550 2'550 3'000 3'000
:nadusted net inco!e Ite! 1 Ite! 2 Ite! 3 Ite! 4 error in recording depreciation #dusted net inco!e #ns$er% 1& , 2& #
14
16'450 16'552
3'002 arrying >alue 235'000 1'450 236'450 1'552 23)'002
#!ort&
3&
2002 303'000 -114'600. 25'*20 -1'450. -25'500. 2'550 9999999999 1)*'*20 4& #
2003 232'200 114'600 -25'*20. -1'552. -30'000 2'550 3'000 2*4')() 5&
!,000
Problem 5
ou %ave been assined to e'amine t%e inancial statements o =acelle Company or t%e year ended "ecember !1, 2006. Aelow is t%e Aalance %eet o t%e company. Current assets Non:current assets 3otal +ssets
&00,000 2,000,000 KKKKKKKKK 2,&00,000
Current liabilities 2/0,000 Non:current liabilities*00,000 toc7%olders# >4uity 1,//0,000 3otal liabilitiesE@> 2,&00,000
n t%e course o your audit, you discover t%e ollowin situations1. "epreciation o P16,000 or 2006 on delivery ve%icles was not recorded. 2. 3%e p%ysical inventory count on "ecember !1, 200/, improperly e'cluded merc%andise costin P*/,000 t%at %ad been temporarily stored in a public ware%ouse. =acelle uses periodic inventory system. !. 3%e p%ysical inventory count on "ecember !1, 2006, improperly included merc%andise wit% a cost o P2,/00 t%at %ad been recorded as a sale on "ecember 2&, 2006. . + collection o P28,000 on account rom a customer received on was not recorded until anuary 2, 200&.
"ecember !1, 2006
/. n 2006, t%e company sold or P18,/00 ully depreciated e4uipment t%at oriinally cost P110,000. 3%e company credited t%e proceeds rom t%e sale to t%e >4uipment account. 6. "urin November 2006, a competitor company iled a patent:inrinement suit aainst =acelle claimin damaes o P1,100,000. 3%e company#s leal counsel %as indicated t%at an unavorable verdict is probable and a reasonable estimate o t%e court#s award to t%e competitor is P62/,000. 3%e company %as not relected or disclosed t%is situation in t%e inancial statements. &. =acelle %as a portolio o tradin securities. No entry %as been made to ad$ust to mar7et. normation on cost and mar7et value is as ollows-
"ecember !1, 200/ "ecember !1, 2006
CO3 P 1*0,000 168,000
=+RL>3 P 1*0,000 16,000
8. +t "ecember !1, 2006, an analysis o payroll inormation s%ows accrued salaries o P!6,600. 3%e +ccrued alaries payable account %ad a balance o P8,000 at "ecember !1, 2006, w%ic% was unc%aned rom its balance at "ecember !1, 200/. *. + lare piece o e4uipment was purc%ased on anuary !, 2006, or P1,600,000 and was c%ared to Repairs >'pense. 3%e e4uipment is estimated to %ave a service lie o 8 years and no residual value. =acelle normally uses t%e strai%t J line depreciation met%od or t%is type o e4uipment. 10. + P&/,000 insurance premium paid on uly 1, 200/, or a policy t%at e'pires on une !0, 200*, was c%ared to insurance e'pense.
15
11. + trademar7 was ac4uired at t%e beinnin o 200/ or P2/0,000. No amorti9ation %as been recorded since its ac4uisition. 3rademar7 %as an economic lie o / years. +uestions 1. Current assets at year:end isa. P &&6,000 b. P 6*/,000 c. P 6*1,000 d. P 6&8,/00 2. Non:current assets at year:end isa. P !,*8,/00 b. P !,02,/00
c. P !,!02,/00
d. P !,2*8,/00
!. Current liabilities at year:end isa. P *11,600 b. P 86!,600
c. P 286,600
d. P 2!8,600
. Non:current liabilities at year:end isa. P 1,/61,600 b. P 1,/2/,000
c. P 1,/1!,600
d. P *00,000
/. 3%e net income o 2006 is understated bya. P 622,00 b. P 60!,*00
c. P /68,00
d. P //*,*00
6. 3%e total amount o undamental error isa. P 1&6,000 b. P 1/&,/00
c. P 10&,/00
d. P 2/,000
&. 3otal toc7%olders# >4uity at year:end isa. P 2,!2*,*00 b. P 2,22*,*00
c. P 2,22&,00
d. P 2,0**,00
8. 3%e correctin entry o item H!I assumin t%e company#s boo7s were already closed isa. No ad$ustment b. Retained earnins 2,/00 Cost o sales 2,/00 c. Cost o sales 2,/00 Retained earnins 2,/00 d. Retained >arnins 2,/00 nventory 2,/00 Solution
1& 2& 3& 4& 5&
6& (&
)&
*&
16
,epreciation expense 16'000 #ccu!ulated depreciation ost o sales -beg& in. *5'000 Retained earnings ost o sales 42'500 Inentory as< 2)'000 #ccounts receiable #ccu!ulated depreciation 110'000 @acaluation allo$ance @arBet alue ; beg& 1*0'000 @arBet alue ; end 164'000 :nrealiAed
16'000 *5'000 42'500 2)'000 *1'500 1)'500 625'000 26'000
4)'000
36'600
Repairs expense 1'600'000 ,epreciation expense 200'000 #ccu!ulated depreciation 200'000 10& Insurance expense 25'000 Prepaid insurance 3('500 Retained earnings 11& "o a!ortiAation since no inor!ation about its i!pair!ent& #ns$er% 1& 2&
3&
4& ,
5&
6& #
(& #
62'500
)& ,
Problem 6
=atias Corporation re4uires audited inancial statements or credit purposes. +ter ma7in normal ad$ustin entries, but beore closin t%e accountin records or t%e year ended "ecember !1, 2006. =atias#s controller prepared t%e ollowin inancial statements or 2006=atias Corporation 3+3>=>N3 O; ;N+NC+F PO3ON ,ece!ber 31' 2006 #ssets Cas% 1,22/,000 =ar7etable e4uity securities 12/,000 +ccounts Receivable 60,000 +llowance or doubtul accounts 5 //,000 nventories /!0,000 Property and e4uipment 620,000 +ccumulated "epreciation 5 280,000 3otal +ssets 2,62/,000 iabilities and tocB
1,68/,000 110,000 !00,000 &/,000 //,000 2,62/,000
=atias Corporation 3+3>=>N3 O; NCO=> 7or t'penses ellin and administrative 8,000 "epreciation 2,000 ncome beore income ta' 60,000 ncome ta' e'pense 1*2,000 Net ncome 8,000 =atias#s ta' rate or all items was !0 or all aected years, and it made estimated ta' payments w%en due. =atias %as been proitable in t%e past and e'pects results in t%e uture to be similar to 2006. "urin t%e course o t%e audit, t%e ollowin additional inormation 5not considered w%en t%e above statements were prepared was obtained-
17
1. 3%e investment portolio consists o s%ort:term investment, classiied as available:or: sale, or w%ic% total mar7et value e4ualed cost at "ecember !1, 200/. On ;ebruary 2, 2006, =atias sold one investment wit% a carryin value o P100,000 or P1!0,000. 3%e total o t%e sale proceeds was credited to t%e investment account. 2. +t "ecember !1, 2006, t%e mar7et value o t%e remainin securities in t%e portolio was P12,000. !. 3%e P/!0,000 inventory total, w%ic% was based on a p%ysical count at "ecember !1, 2006, was priced at cost. ubse4uently, it was determined t%at t%e inventory cost was overstated by P66,000. +t "ecember !1, 2006, t%e inventory#s mar7et value appro'imated t%e ad$usted cost. . Pollution control devices costin P8,000, w%ic% is %i% in relation to t%e cost o t%e oriinal e4uipment, were installed on "ecember 2*, 200/, and were c%ared to repairs in 200/. /. 3%e oriinal e4uipment reerred to in tem , w%ic% %ad a remainin useul lie o si' years on "ecember 20, 200/, is bein depreciated by t%e strai%t:line met%od or bot% inancial and ta' reportin. 6. + lawsuit was iled aainst =atias Corporation in October 2006 claimin damaes o P2/0,000. Company#s leal counsel believes t%at an unavorable outcome is probable, and a reasonable estimate o t%e court#s award to t%e plainti is P60,000, w%ic% will be paid in 200& i t%e case is settled. +uestions 1. =ar7etable >4uity ecurities at year:end isa. P 1//,000 b. P 12/,000
c. P */,000
d. P 82,000
2. +llowance or mar7et decline in value o mar7etable e4uity security at year:end isa. P 0 b. P 8,000 c. P 10,000 d. P 1!,000 !. nventory at year:end isa. P 6,000 b. P /12,000
c. P /!0,000
d. P /*6,000
. Cost o sales at year:end isa. P 6!6,000 b. P /&0,000
c. P //0,000
d. P /0,000
/. Net income o t%e company isa. P !**,&00 b. P !&*,000
c. P !66,100
d. P !!1,000
Solution
1&
@arBetable e?uity securities 8ain on sale 2& oss on !arBet decline #llo$ance or !arBet decline 3& ost o sales Inentory 4& E?uip!ent Retained earnings 5& ,epreciation #ccu!ulated depreciation 6& oss on da!ages Esti!ated liability on da!ages #ns$er%
18
30'000 30'000 13'000 13'000 66'000 66'000 4)'000 4)'000 )'000 )'000 60'000 60'000
1&
#
2& ,
3& #
4& #
5&
Problem 7
Fon establis%ed a retail business in 200. >arly in 200&, Fon entered into neotiations wit% %ort wit% t%e intent to orm a partners%ip. ou %ave been as7ed by Fon and %ort to c%ec7 Fon#s boo7s or t%e past t%ree years to %elp %ort evaluate t%e earnins potential o t%e business. 3%e net incomes reported on statements submitted to you were as ollows-
ncome, preta'
ear endin 12E!1 200/ P &0,&6!
200 P6!,000
2006 P 61,880
"urin t%e e'amination o t%e accounts, you ound t%e data iven below;or year ended "ec. !1 200 200/ 2006 Omission rom t%e boo7s a. +ccrued e'penses at end o year P 1/,120 P 1,6/8 P !2,!68 b. >arned 5uncollected revenue at end o year 1,00 c. Prepaid e'penses at end o year 6,!1 8,&0 *,82 d.
18,2&0
21,60
11,*&0
1!,&10
Ot%er points re4uirin considerations. On anuary 1, 2006, sold operational e4uipment or P!1,/00 t%at oriinally cost P!/,000 on anuary 1, 200. Cas% was debited or P!1,/00 and e4uipment was credited or P!1,/00. 3%e asset sold was depreciated in 200 and 200/ but not on t%e 2006 on t%e basis o a 10:year lie and no residual value. %. No allowance or bad debts %as been set up. +n analysis o accounts receivable as o "ecember !1, 2006, indicates t%at t%e allowance account s%ould %ave a balance o P1,000, o w%ic% P!,/00 relates to 200, P,*00 to 200/, and P/,600 to 2006. +uestions 1. +d$usted net income o 200 isa. P 8/,8! b. P 82,!!
c. P /2,0*
d. P !*,66
2. +d$usted net income o 200/ isa. P 81,66* b. P 81,081
c. P 80,1/&
d. P &6,&6*
19
!. +d$usted net income o 2006 isa. P 86,/02 b. P /6,682 . nventory at year:end is understated bya. P !,!&0 b. P &,*!0
c. P /1,082
d. P 2,682
c. P 21,60
d. P !/,!/0
/. +ccrued e'penses at year:end isa. Overstated by P1&,&10 b.
c.
Solution
:nadusted net inco!e Ite! #
Ite! Ite!
2004 63'000 -15'120.
1'400 6'314
Ite! , Ite! E Ite! 7 Ite! 8 Ite! D #dusted net inco!e #ns$er% 1& 2&
2005 (0'(63 15'120 -14'65).
2006 61'))0 14'65) -32'36).
-1'400. -6'314. )'4(0 -4'2(0. 1)'2(0
-3'500. 52'0*4
-4'*00. )1'0)1
3&
4&
-)'4(0. *')42 4'2(0 -1)'2(0. 21'640 3'500 -5'600. 51'0)2 5&
Problem 8
MFF+ F"+ CO. 3%e records o t%e Company %ave not been e'amined or t%e t%ree:year period ended "ecember !1, 2006. +s a result o your audit o t%e records or t%e year ended "ecember !1, 2006 and your review o t%e records o t%e two prior years, it is necessary to revise t%e net income and t%e retained income based upon t%e audited data, w%ic% ollows3%e company#s retained income at "ecember !1, 2006 ollowsAalance, 12E!1E0 Net income, 200/ Net income, 2006 Aalance, 12E!1E06
P *0,000 100,000 110,000 P!00,000
;rom your e'amination, you obtained t%e ollowin inormation w%ic% must be ta7en into consideration at t%e close o t%e year involved"ecember !1, 200 1.
Doods consined out to consinees are included in t%e inventory at P120,000, w%ic% is 20 percent in e'cess o cost. 2. >4uipment wit% a 10:year:lie was purc%ased or P!0,000 and c%ared to e'pense on "ecember !1. !. 3%e ollowin liabilities are omitted rom t%e records=aterials included in inventory P !,000 +ccrued ta'es ,100
20
"ecember !1, 200/ . /.
6.
Dain o P!,000 on sale o ully depreciated e4uipment was credited to t%e allowance or depreciation. &. Fand cost o P*,000 %ad been erroneously c%ared to e'pense. 8. 3%e inventory is overstated by P1,!00 because o an error in ootin an inventory price s%eet. *. "epreciation was omittedG P/,000 s%ould be provided. "ecember !1, 2006 10.
3%e ollowin liabilities are omitted rom t%e records;or purc%ases o new mac%inery on "ecember !1, 2006 P12,000 +ccrued ta'es /,*00
+uestions 1. +d$usted net income o 200/ isa. P 11*,00 b. P 110,800
c. P 102,600
d. P *0,800
2. +d$usted net income o 2006 isa. P 8*,800 b. P *8,600
c. P 11/,00
d. P 1/,00
!. +d$usted retained earnins o 200 isa. P 112,*00 b. P 10*,*00
c. P *2,*00
d. P 8*,*00
. +d$usted retained earnins o 200/ isa. P 180,&00 b. P 20!,&00
c. P 212,/00
d. P 212,!00
/. +d$usted retained earnins o 2006 isa. P 16,200 b. P 16,000
c. P !1*,100
d. P 2*6,100
6 a. b. c.
d.
3%e entry to correct inormation Hnumber !I at "ecember !1, 2006 isRetained earnins ,100 +ccrued ta'es ,100 Cost o sales !,000 +ccounts payable !,000 Retained earnins ,100 Cost o sales !,000 +ccrued ta'es ,100 +ccounts payable !,000 No ad$ustin entry is necessary.
*. 3%e entry to correct inormation Hnumber I at "ecember !1, 2006 isa. +llowance or bad debts *,000 +ccounts receivable *,000 b. Retained earnins *,000 +ccounts receivable *,000 c. Retained earnins *,000 +llowance or bad debts *,000
21
d. No ad$ustin entry is necessary 8. +d$usted net income o 200 5assumin P8/,000 is recorded as net income o 200 isa. P 116,*00 b. P 11/,000 c. P 10&,*00 d. P 8&,*00 Solution
1& 2&
"o adust!ent since t
-20'000. 30'000 -3'000. -4'100.
999999999
2005 100'000 20'000 -3'000. 3'000 4'100 -6'000. 3'000 *'000 -14'300. -5'000. 999999999 110')00 *0'000 -20'000. 30'000 -3'000. -4'100. 203'(00
5&
6& ,
(& #
2006 110'000 -3'000.
14'300 -5'*00. 115'400 203'(00
999999999 31*'100
)& ,
Problem 9
3%e Corporation prepared its own income statement or t%e years 200/ and 2006. 3%e President was not satisied and decided to enae t%e services o a CP+. 3%e ollowin errors were discovered by t%e CP+ KKK200/KK KKK2006KKK Net income ater income ta' P 12!,2/0 P 1/6,2/0 nventory understatement at year:end P : P 12,/00
22
Prepaid e'penses not ta7en up =erc%andise purc%ased on account not Recorded as liability but included in inventory
/,000
1/,000
2/,000 20,000
*,000 1/,000
+uestions 1. Net income o 200/ isa. P 16!,2/0
b. P 108,2/0 c. P 8!,2/0
d. P &!,2/0
2. Net income o 2006 isa. P 1**,&/0
b. P 1&,&/0 c. P 1,&/0
d. P 12,2/0
Solution
:nadusted net inco!e
2005 123'250 5'000 -25'000.
#dusted net inco!e #ns$er% 1& 2& #
-20'000. 9999999999 )3'250
2006 156'250 12'500 -5'000. 15'000 25'000 -*'000. 20'000 -15'000. 1**'(50
Problem 1O
(i9ard Company, a calendar:year sole proprietors%ip, maintained its boo7s on t%e cas% basis durin t%e year (i9ard is in t%e process o neotiatin a ban7 loan to inance t%e planned e'pansion o its business. 3%e ban7 is re4uestin 2006 inancial statements prepared on t%e accrual basis o accountin rom (i9ard. +s (i9ard#s e'ternal auditor, you were called upon to assist in preparin t%e inancial statements. 3%e ollowin inormation were obtained durin t%e course o your enaement(i9ard Company 3R+F A+F+NC> "ecember !1, 2006 "ebits Credits Cas% P8,000 +ccounts receivable, 12E!1E0/ 28!,/00 nventory, 12E!1E0/ 1,08/,000 ;urniture ;i'tures 2,068,/00 Fease%old improvements &8&,/00 +ccumulated depreciation, 12E!1E0/ P /6&,000 +ccounts payable 2*&,/00 (i9ard, "rawins (i9ard, Capital, 12E!1E0/ 2,180,/00 ales 11,2&,/00 Purc%ases /,!!*,2/0 alaries e'pense !,0/,000 3a'es and licenses 21&,000 nsurance e'pense 1/2,2/0 Rent e'pense /*8,/00
23
220,/00 22&,/00 P 1,&2,/00
KKKKKKKKK P 1,&2,/00
+dditional inormation1. +t "ecember !1, 2006, amounts due rom customers totaled P1/,000. 2. Aased on t%e analysis o t%e above receivables, P20,&/0 may prove uncollectible. !.
b. P 28!,/00
c. P 1!1,/00
d. P 1/2,000
2. +ccounts Receivable, net a. P 08,2/ b. P 0,62/
c. P !*,2/0
d. P 262,/00
!. nventory a. P 1,2&,000
b. P 1,08/,000
c. P 18*,000
d. P 8*6,000
. Prepaid nsurance a. P 1&,000
b. P
c. P /0,&/0
d. P0
24
*6,2/0
/.
Property and e4uipment, net a. P 2,8/6,000 b. P 2,616,6* 6. +ccounts payable a. P /!!,&/0 b. P /2!,&/0 &.
8.
*.
c. P 2,0!*,62/
d. P 1,8/8,/00
c. P 2*&,/00
d.P 2!6,2/0
c. P 2,&/0
d. P0
(i9ard, "rawins a. P &0&,/00 b. P 80,000
c.
d. P0
(i9ard, Capital, 12E!1E0/ a. P 2,226,000 b. P 2,181,000
c. P 2,180,/00
d. P 2,1!/,/00
c. P 11,2&,/00
d. P 11,2*6,000
b. P /,/&/,/00
c. P /,!!*,2/0
d. P /,10!,000
alaries >'pense a. P !,2&2,/00 b. P !,0/,000
c. P 2,6//,000
d. P 2,/6/,000
3a'es and licenses a. P 2/0,&/0 b. P 2!0,/00
c. P 21&,000
d. P 20!,/00
nsurance e'pense a. P 1*&,&/0 b. P 1&,000
c. P 1/2,2/0
d. P 101,/00
c. P 220,/00
d. P 1*/,&/0
"oubtul account e'pense a. P 20,&/0 b. P 10,!&/
c. P 6,/&/
d. P 0
"epreciation e'pense a. P 2*,!&/ b. P 2*,!&/
c. P 2!*,/!1
d. P 210,000
Cost o sales a. P /,!86,/00 b. P /,!68,/00
c. P /,1/0,2/0
d. P ,06/,000
>stimated loss rom lawsuit a. P ,000,000 b. P !,000,000
c. P /00,000
d. P0
+ccrued >'penses a. P 11,&/0 b. P
10.
ales P 11,82,/00
a. 11.
12.
1!.
1.
1/.
16.
1&.
18.
1*.
Purc%ases a. P /,8&!,000
b.
6*,&/0
P 11,//*,000
P 22&,/00
Solution
1& 2& 3& 4& 5&
# #
P415'000 gien in ite! no& 1 P3*4'250 -P415'000 ; P20'(50 ite! no& 2. P1'2(4'000 gien in ite! no& 4 P152'250 x 4/12 P50'(50
7urniture ixtures ease
2'06)'500 ()('500 - 5 6('000. - 3*'3(5.
25
6& (& )&
*&
# #
2002 ,epCn ; urniture arrying alue ; 2002 P533'(50 gien in ite! no& 3 P6*'(50 gien in ite! no& (
- 210'000 . 2'03*'625
alaries ; P40'000 x 12 iing allo$ance P4'3(5 x 52 $eeBs =otal
P 4)0'000 22('500 (0('500
apital ; beg& F!ission o prepai d expense in 2001 F!ission o accrued expenses in 2001 =otal
2'1)0'500 45'500 - 45'000 . 2'1)1'000
ales ; cas< basis G #R ; end #R ; beg ales ; accrual basis
11'42('500 415'000 2)3'500 11'55*'000
Purc
5'33*'250 533'(50 2*('500 5'5(5'500
10&
11&
12& , alaries per record 3'045'000 alaries o t
licenses ; cas< basis taxes ; end taxes ; beg licenses ; accrual basis
21('000 33'(50 20'250 230'500
Insurance expense ; cas< basis G Prepaid insurance ; beg Prepaid insurance ; end Insurance expense ; accrual basis
152'250 45'500 50'(50 14('000
14&
15&
16& 1(& 1)&
1*&
:tilities ; cas< basis G #ccrued utilities ; end #ccrued utilities ; beg :tilities ; accrual basis # ; gien in ite! 2 ; reer to +uestion 5 ?uestion # eginning inentory Purc
220'500 36'000 24'(50 231'(50
1'0)5'000 5'5(5'500 -1'2(4'000 . 5'3)6'500
or t
Problem 11
ou %ave been enaed to e'amine t%e inancial statements o Mince Corporation or t%e year ended "ecember !1, 2006. n t%e course o your e'amination, you %ave ascertained t%e ollowin inormation1.
26
Mince uses t%e allowance met%od o accountin or uncollectible trade accounts receivable. 3%e allowance is based upon ! o past due accounts 5over 120 days and 1 o current accounts as o t%e close o eac% mont%. "ue to t%e c%anin economic conditions and climate, t%e amount o past due accounts %as increased siniicantly, and
manaement %as decided to increase t%e percentae based on past due accounts to /. 3%e ollowin balances are available-
+ccounts Receivable Past due accounts 5included in +ccounts Receivable +llowance or uncol: lectible accounts
+s o Nov. !0, 2006
+s o "ec. !1, 2006
"ebit
"ebit
Credit
Credit
P !*0,000 12,00 0
:
P !0,000
:
:
!0,000
:
:
P 28,000
*,000
:
2.
3%e merc%andise inventory on "ecember !1, 200/ did not include merc%andise %avin a cost o P&,000.00 w%ic% was stored in a public ware%ouse. =erc%andise %avin a cost o P!,000.00 was erroneously counted twice and included twice in t%e merc%andise inventory on "ecember !1, 2006. Mince uses a periodic inventory system.
!.
On anuary 2, 2006, Mince %ad a new mac%ine delivered and installed in its new actory. 3%e cost o t%is mac%ine was P*&,000.00 and t%e mac%ine is bein depreciated on a strai%t:line met%od over an estimated useul lie o 10 years. (%en t%e new mac%ine was installed, Mince paid or t%e ollowin items w%ic% were not included in t%e cost o t%e mac%ine, but were c%ared to repairs and maintenance"elivery >'pense : P 2,/00.00 nstallation Costs : 8,000.00 Rearranement o related >4uipment : ,000.00 P1,/00.00
.
On =ay !, 2006, Mince e'c%aned /00 s%ares o treasury stoc7 5P/0.00 par value common stoc7 or a parcel o land to be used as a site or a new actory. 3%e treasury stoc7 %ad a cost P&0.00 per s%are w%en it was ac4uired and on =ay 0!, 2006, it %ad a air value o P80.00 per s%are. Mince received P2,000.00 w%en an e'istin buildin on t%e land was sold or scrap. 3%e land was capitali9ed at P0,0000.00 and Mince recorded a ain o P/,000.00 on t%e sale o its treasury stoc7. ou ound t%e ollowin $ournal entries in t%e boo7sFand . . . . . . . . . . . . . . . P 0,000.00 3reasury stoc7 . . . . . . . . . . . . . . P !/,000.00 Dain on ale o treasury stoc7 . . . . . /,000.00 Cas% . . . . . . . . . . . . . . . =iscellaneous ncome . . . . . . . . . .
/.
P 2,000.00 P 2,000.00
On anuary 02, 2006, Mince Corporation establis%ed a noncontributory deined beneit plan coverin all employees and contributed P 1,000,000.00 to t%e plan and c%ared t%is amount to t%e Hpension e'penseI. +t "ecember !1, 2006, Mince determined t%at t%e 2006 current service and interest costs on t%e plan amount to P 620,000,00. 3%e e'pected and actual rate o return on plan assets or 2006 was 10.
+uestions 1. 3%e allowance or uncollectible accounts to be reported on t%e Aalance %eet isa. P 1,/00.00 b. P *,000.00 c. P /,/00.00 d. P ,000.00
27
2.
"oubtul account e'pense at "ecember !1, 2006 isa. P 1,/00.00 b. P *,000.00 c. P /,/00.00 d. P ,000.00 !. 2006 merc%andise inventory isa.
no proper correctin entries were made at "ecember !1, 200/, by %ow muc% will 200/ net income beore income ta'es be overstated or understated) a.
/.
=ac%inery and e4uipment account s%ould be reported in t%e balance s%eet 5net o accumulated depreciation at "ecember !1, 2006a. P 100,!/0.00 b. P 110,0/0.00 c. P 111,/00.00 d. P 101,800.00
6.
Fand account s%ould be reported in t%e balance s%eet at "ecember !1, 2006a. P !/,000.00 b. P !!,000.00 c. P 0,000.00 d. P !8,000.00
&.
(%at s%ould be reported at "ecember !1, 2006 as prepaid pension cost) a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 80,000.00
8.
(%at amount s%ould be reported as pension e'pense in 2006) a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 80,000.00
*.
@ow muc% ain s%ould be reported on item no. ) a. P /,000.00 b. P 1/,000.00 c. P 10,000.00
10.
d. P 0
no proper correctin entries were made at "ecember !1, 2006, by %ow muc% will 2006 net income beore income ta'es be overstated or understated) a.
Solution
-1.
-2.
-3.
-4.
28
,oubtul #ccount Expense 14'500&00 #llo$ance or ,/# Re?uired allo$ance as o 12&31&2006 on past due accounts -5J x P30'000&00. P 1'500&00 on current accounts -1J x P400'000&00. 4'000&00 =otal P 5'500&00 :nadusted KdebitL balance o #llo$ance or ,/# *'000&00 #dditional Proision -expense. P14'500&00 a& @erc
14'500&00
('000&00
3'000&00
14'500&00
1'450&00
2'000&00 5'000&00
-5.
-to correct clientCs entry on t
#ns$er% 1& 2& #
3&
4& #
5& #
6& ,
(& ,
)&
*& ,
10& ,
Problem 12
Ron:Ron torae underwent a restructurin in 2006. 3%e company conducted a t%orou% internal audit, durin w%ic% t%e ollowin acts were discovered. 3%e audit occurred durin 2006 beore any ad$ustin entries or closin entries are prepared. a. +dditional printers were ac4uired at t%e beinnin o 200 and added to t%e company#s oice networ7. 3%e P*,000 cost o t%e printers was inadvertently recorded as maintenance e'pense. 3%e printers %ave ive:year useul lives and no material salvae value. 3%is class o e4uipment is depreciated by t%e strai%t:line met%od. b. 3%ree wee7s prior to t%e audit, t%e company paid P/1,000 or storae bo'es and recorded t%e e'penditure as oice supplies on %and. 3%e error was discovered a wee7 later. c. On "ecember !1, 200/, inventory was understated by P112,000 due to a mista7e in t%e p%ysical inventory count. 3%e company uses t%e periodic inventory system. d. 3%ree years earlier, t%e company recorded a ! stoc7 dividend 5,000 common s%ares, P1 as ollowsRetained earnins Common stoc7
,000 ,000
3%e s%ares %ad a mar7et price at t%e time o P10 per s%are. e. +t t%e end o 200/, t%e company ailed to accrue interest e'pense t%at accrued durin t%e last our mont%s o 200/ on bonds payable. 3%e bonds w%ic% were issued at ace value mature in 2010. 3%e ollowin entry was recorded on =arc% 1, 2006, w%en t%e semi:annual interest was paidnterest e'pense Cas% .
180,000 180,000
+ t%ree:year liability insurance policy was purc%ased at t%e beinnin o 200/ or P216,000. 3%e ull premium was debited to insurance e'pense at t%e time.
+uestions 1.
Net income o 200 isa. Overstated by P*,000 b.
c. Overstated by P&,200 d.
29
2. a. b. !. a. b. .
Net income o 200/ is
c.
+ccrued interest on Aonds Payable is a. P 60,000 b. P 80,000 c. P 120,000
d. P 180,000
Solution
2004 *'000 -1')00.
# , E 7 :nder/-Fer. #ns$er% 1& , 2& 3&
999999999 ('200
2005
2006
-1')00.
-1')00.
112'000
-112'000.
-120'000.
120'000 -120'000. -(2'000. 1)5')00
144'000 134'200
4&
Problem 13
ou been as7ed by a client to review t%e records o t%e Claire oy Company, a small manuacturer o precision tools and mac%ines. our client is interested in buyin t%e business, and arranements %ave been made or you to review t%e accountin records. our e'amination reveals t%e ollowina. Claire oy Company commenced business on +pril 1, 200!, reportin on a iscal year endin =arc% !1. 3%e company %as never been audited, but t%e annual statements prepared by t%e boo77eeper relect t%e ollowin income beore closin and beore deductin income ta'esear >nded =arc% !1 200 200/ 2006
ncome Aeore 3a'es P &1,600 111,00 10!,/80
b. + relatively small number o mac%ines %ave been s%ipped on consinment. 3%ese transactions %ave been recorded as an ordinary sale and billed as suc%. On =arc% !1 o eac% year, mac%ines billed and in t%e %ands o consinees amounted or200.. P&, 800 200/.. none 2006.. /, /*0 ales price was determined by addin !0 to cost. oods were sold t%e ollowin year.
ou learned t%at t%e consined
c. On =arc% !0, 200/, two mac%ines were s%ipped to a customer on a C.O.". basis. 3%e sale was not entered until +pril /, 200/ w%en cas% was received or P6,100. 3%e mac%ines were not included in t%e inventory at =arc% !1, 200/. 53itle passed on =arc% !0, 200/.
30
d.
+ll mac%ines are sold sub$ect to a ive:year warranty. t is estimated t%at t%e e'pense ultimately to be in connection wit% t%e warranty will amount to o 1 o sales. 3%e company %as c%ared an e'pense account or warranty costs incurred. ales per boo7s and warranty costs wereMarranty o Expense or ales @ade in Year Ended @arc< 31ales 2004 2005 2006 =otal 200 P*0, 000 P&60 P&60 200/ 1, 010, 000 !60 P1, !10 1, 6&0 2006 1, &*/, 000 !20 1, 620 P1, *10 !, 8/0
e. 3%e ban7 deducts 6 on all contracts inanced. O t%is amount is place in a reserve to t%e credit o Claire oy Company, w%ic% is reunded to Claire oy as inance contracts are paid in ull. 3%e reserve establis%ed by t%e ban7 %as not been relected in t%e boo7s o Claire oy. 3%e e'cess o credits over debits 5net increase to t%e reserve account wit% Claire oy, on t%e boo7s o t%e ban7 or eac% iscal year were as ollows200. P , 000 200/. , 000 2006. /, 000 P 1, 000 .
+ delivery e4uipment wit% a 10:year lie 5no residual value, strai%t:line depreciation was purc%ased on +pril 1, 200/ by issuin a P 600,000 non: interest: bearin, year note. 3%e entry made to record t%e purc%ase was a debit to "elivery >4uipment and a credit to Notes payable or P 600,000G a 10 is a air rate o interest on t%e note. 3%e accountant ailed to provide or depreciation or t%e year on t%is e4uipment.
. ;or t%e last t%ree 5! years, t%e company %as ailed to accrue salaries and waes. 3%e correct amounts at t%e end o eac% iscal year were200. P 12, 000 200/. 18, 000 2006. 10, 000 +uestions +nswer t%e ollowin 4uestions based on t%e audit indins. nore income ta' implications. 1. a.
b.
c. d.
3%e ad$ustin entry to set up t%e estimated Fiability under (arranties is (arranty e'pense /,11 Retained earnins &,006 >stimated liability under warranties 12,1& Retained earnins /,11 (arranty e'pense &,006 >stimated liability under warranties 12,1& (arranty e'pense 12,1& >stimated liability under warranties 12,1& Retained earnins 12,1& >stimated liability under warranties 12,1&
2.
3%e total receivable rom t%e ban7 representin dealers und reserve as o =arc% !1, 2006 isa. P /,100 b. P 6,*00 c. P 12,000 d. P 1,000
!.
ales in 200 were 5over understated by a. P 6,/00 b. P 56,/00 c. P &,800
d. P 5&,800
31
.
ales in 2006 were 5over understated bya. P 6,/00 b. P 56,100 c. P 5/,/*0 d. P 511,6*0 /. 3%e accrued alaries Payable t%at s%ould be set up on =arc% !1, 2006 isa. P 18,000 b. P 28,000 c. P 10,000 d. P 0,000 6. a. P 0 &.
3%e audited balance o "iscount on Note Payable as o =arc% !1, 2006 isb. P 102, /2 c. P 1*, 211 d. P 1*0, 1*2
"epreciation >'pense or iscal year 2006 t%at s%ould be provided on t%e e4uipment purc%ased on +pril 1, 200/ is a. P 1!,660 b. P 0,*81 c. P 60,000 d. P 66,000
Solution
#dusting entry% b&
ales 5'5*0 #ccounts receiable 5'5*0 Inentory 4'300 ost o sales 4'300 c& ales 6'100 Retained earnings beg 6'100 d& Marranty expense 12'41( Esti!ated $arranty payable 12'41( 2004 *40'000 ; (')00 *32'200 2005 1'010'000 G 6'100 ; (')00 1'023'*00 2006 1'(*5'000 ; 5'5*0 ; 6'100 1'()3'310 #dusted balance 3'(3*'410 N O o 1J &005 =otal Marranty expense 1)'6*( ess% Marranty paid 6'2)0 Esti!ated $arranty liability 12'41( e& 7und resere ro! t
3& ,
4& ,
5&
6&
(&
Problem 14
ou are auditin t%e accounts o Leit% Qandro =erc%andisin Corporation or t%e year ended "ecember !1, 2006. ou discover t%at t%e ad$ustments made in t%e previous audit or t%e year 200/ were not entered in t%e accounts by Leit% Qandro#s boo77eeperG t%ereore, t%e accounts are not in areement wit% t%e audited amounts as o "ecember !1, 200/. 3%e ollowin ad$ustments were included in t%e 200/ audit report-
32
a.
nvoices or merc%andise purc%ased on credit in "ecember 200/ were not entered on t%e boo7s until payment o P12,000 was made in anuary 2006. 3%e merc%andise was not included in t%e "ecember !1, 200/ inventory. 3%e company uses a periodic inventory system. b. nvoices or merc%andise received on credit in "ecember 200/ were not recorded in t%e accounts until payment was made in anuary 2006G t%e oods were included in t%e 200/ endin inventory, P18,000. c.
+llowance or doubtul accounts or 200/ was understated by P2,000 because bad debts e'pense in 200/ was not recorded.
d.
ellin e'pense or 200/, P/,000, was not recorded in t%e accounts until paid in 2006.
e.
+ccrued w aes o P ,000 at "ecember ! 1, 2 00/, w ere not r ecorded in t %e accounts until paid in anuary 2006.
.
Prepaid insurance at "ecember !1, 200/ was understated by P600 because t%is amount was included in 200/ e'pense. 3%e insurance policy e'pires on "ecember !1, 2006.
.
ncome ta' e'pense o P2,00 or t%e last part o t%e year ended "ecember !1, 200/, was not recorded until paid in anuary 2006.
%.
"epreciation o P*,000 was not recorded or 200/.
+uestions% Aased on t%e inormation iven, answer t%e ollowin1.
2.
!.
.
/.
Net income o 200/ is overstated by a. P 0,00 b. P !*,800 c. P !8,00
d. P 2*,00
Net income o 2006 is understated by a. P 0,800 b. P !*,800 c. P 28,800
d. P 2&,800
Operatin e'penses o 200/ is understated by a. P 21,800 b. P 21,800 c. P 20,600
d. P 1*,00
Operatin e'pense o 2006 is overstated by a. P 21,800 b. P 10,800 c. P *,000
d. P 8,00
Cost o sales o 2006 is a. Overstated by P18,000 b.
c.
Solution
NET INCOME 2005 #& F!ission o purc
-12'000. 12'000 -1)'000. -2'000. -5'000. -4'000.
2006 12'000 -12'000. 1)'000 5'000 4'000
33
7 8 D
600 -2'400. -*'000. -3*')00.
-600. 2'400 9999999 2)')00
FPER#=I"8 ENPE"E 2005 2006
# & & , E 7 8 D #ns$er% 1& 2&
3& ,
4& ,
-2'000. -5'000. -4'000. 600
5'000 4'000 -600.
-*'000. -1*'400.
9999999 )'400
5& #
Pro0blem 15
3uburan Company was orani9ed durin 2002 by t%ree tec%nical e'perts to assemble 5parts to be purc%ased rom suppliers and mar7et an electronic device t%at t%ey %ad previously patented. No products were sold durin 2002G %owever, 200! and 200 produced siniicant sales, but modest proits. "urin 200!, t%e company %ired boo77eeper w%o, alt%ou% very industrious, %ad very little 7nowlede o accountin. Reali9in t%is competency problem, t%e company is considerin enain an outside independent CP+ to as t%ey said Hstrai%ten t%ins out and ma7e recommendations.I +mon numerous ot%er accountin problems, ad$ustin entries %ave never been made. 3%e boo77eeper stated t%at Ht%e transactions are recorded in t%e ri%t way w%en t%ey occur.I 3%e ollowin 200/ transactions, and t%e way in w%ic% t%e boo77eeper recorded or e'plained t%em, are bein discusseda.
b.
c.
nventory J endin 200, P!0,000G endin 200/, P&,000 5by inventory count. nventory o parts 1&,000 Purc%ases 1&,000 "epreciation J e4uipment 5purc%ased at t%e beinnin o 200 cost, P80,000G estimated useul lie, 10 yearsG manuacturer#s recommended value at end o / years, P10,000. "epreciation e'pense &,000 >4uipment &,000
Record w%en paid, because t%at is w%en t%e waes re4uires t%e payment o resources and Hit all events out anyway.I d. Note payable, P60,000, ive:year, 1/, interest payable eac% October !1G sined November 1, 200. nterest e'pense *,000 Cas% *,000 ecause t
34
e.
Contract to deliver si' electronic devices, sined October 1/, 200/, pendin assembly, P/,000. "ue rom customers /,000 ales /,000
.
Property ta'es or 200/, billed in November 200/, payable wit%out penalty up to ;ebruary 1/, 200, P*,000. Paid on ;ebruary 1, 2006. ;ebruary 1, 2006Property ta'es *,000 Cas% *,000
.
+dvertisin costs or "ecember 200/, C%ristmas season, P1&,000. Paid, wit%in t%e !0:day credit period, on anuary 26, 2006. anuary 26, 2006+dvertisin Cas%
1&,000 1&,000
+uestions% Aased on t%e inormation iven, answer t%e ollowin1.
nterest e'pense o t%e P60,000 note at "ecember !1, 200/ is a. P 10,/00 b. P *,000 c. P &,/00 d. P 1,/00
2.
nterest payable at "ecember !1, 200/ is a. P *,000 b. P &,/00 c. P 1,/00
d. P
&/0
!.
nventory at "ecember !1, 200/ is a. P 6,000 c. P !0,000 b. P &,000 d. Cannot be determined
.
(aes e'pense at "ecember !1, 200/ is a.
/.
+ccrued e'penses at "ecember !1, 200/ is understated by a. P !8,/00 b. P 12,/00 c. P 11,&/0 d. P 11,000
Solution
1&
2&
P 60'000 x 15J P *'000
3& 4&
5&
P 60'000 x 15J x 2/12 P 1'500 8ien in ite! # Retained earnings 3'000 Mages expense 3'000 Mages expense 11'000 Mages payable 11'000 # Interest payable 1'500 Mages payable 11'000 Property taxes *'000 #dertising 1('000 =otal 3)'500
35
Problem 16
Aran9uela Corporation reported t%e ollowin amounts o net income or t%e years ended "ecember !1, 200!, 200 and 200/200! 200 200/
P12&,000 1/0,000 128,/00
ou are perormin t%e audit or t%e year ended "ecember !1, 200/. "urin your e'amination, you discover t%e ollowin errorsa. +s a result o errors in t%e p%ysical count, endin inventories were misstated as ollows"ecember !1, 200 "ecember !1, 200/
P1,000 understated P2!,000 overstated
b. On "ecember 2*, 200/, Aran9uela recorded as a purc%ase, merc%andise in transit, w%ic% cost P1/,000. 3%e merc%andise was s%ipped ;OA "estination and %ad not arrived by "ecember !1. 3%e merc%andise was not included in t%e endin inventory. c. Aran9uela records sales on t%e accrual basis but ailed to record sales on account made near t%e end o eac% year as ollows 200! 200 200/
P,000 /,000 !,/00
d. 3%e company ailed to record accrued oice salaries as ollows"ecember !1, 200! "ecember !1, 200
P10,000 1,000
e. On =arc% 1, 200, a 10 stoc7 dividend was declared and distributed. 3%e par value o t%e s%ares amounted to P10,000 and mar7et value was P1!,000. t%e stoc7 dividend was recorded as ollows=iscellaneous e'pense Common stoc7 Retained earnins .
36
P1!,000 10,000 !,000
On uly 1, 200, Aran9uela ac4uired a t%ree:year insurance policy. 3%e t%ree:year premium o P6,000 was paid on t%at date, and t%e entire premium was recorded as insurance e'pense.
