Chapter 2 Correction of Errors Problem 1 Under(Over) statement in Profit of
Retained
Nature of error
Earnings
2012 Accounts Affected
01/01/12 Omission of prepaid expenses 12/31/10 12/31/11 12/31/12 Omission of unearned revenue: 12/31/10 12/31/11 12/31/12 Omission of accrued expenses: 12/31/10 12/31/11 12/31/12 Omission of accrued revenues 12/31/10 12/31/11 12/31/12 Net under(over)statement Reported profit(loss) Corrected profit(loss)
2010
2011
29,000
(29,000) 30,000
(20,000)
(27,500)
42,500
24,000 300,000 324,000
2012
20,000 (28,000)
27,500 (25,000)
(42,500) 45,000
( 2,000) (540,000) (542,000)
(30,000) 34,000
28,000 (15,000)
25,000 (27,000)
(45,000) 41,000
11,000 250,000 251,000
Account
30,000
(28,000)
(25,000)
45,000
Dr.
Expenses Prepaid expenses Expenses
2. A
3. D
Expenses Expenses Accrued expenses
27,000
22,000
4. D
5. C
Problem 3 1.
2.
3.
4.
Retained Earnings Wages Expense
160,000
Interest Income Retained Earnings
48,000
Insurance Expense Prepaid Insurance Retained Earnings
18,000 18,000
Supplies Expense Retained Earnings
25,000
160,000
48,000
36,000
25,000
13
34,000
15,000
Problem 2 1. A
30,000 34,000
Revenue Revenue Unearned revenue
Revenues Accrued revenues Revenues
Cr.
28,000 15,000
25,000 27,000
45,000 41,000 41,000
Chapter 2 Correction of Errors 5.
6.
7.
8.
Retained Earnings Accumulated Amortization – Development Cost Capitalized Development Cost Amortization Expense – Development Cost
80,000 80,000
Retained Earnings Service Revenue Unearned Service Revenue
80,000
Retained Earnings Rent Revenue
36,000
120,000 40,000
40,000 40,000
36,000
Office Equipment Depreciation Expense - Equipment Accumulated Depreciation Retained Earnings
1,500,000 300,000 900,000 900,000
Problem 4 (Function of Expense Method) 1. No entry, counterbalanced as of 12/31/11 2.
Retained Earnings Cost of Sales
3.
Retained Earnings Cost of Sales
4.
No entry ( no effect on cost of sales and profit of both 2011 and 2012; as both beginning inventory and purchases in 2012 had been transferred to cost of sales)
5.
Cost of Sales Retained Earnings
6.
Sales Retained Earnings
(Nature of Expense Method) 1. No entry, counterbalanced as of 12/31/11 2.
Retained Earnings Inventory, beginning
3.
Retained Earnings Purchases
4.
Inventory, beginning Purchases
5.
Inventory, beginning Retained Earnings
6.
Sales Retained Earnings
14
Chapter 2 Correction of Errors Problem 5 (Dragon Ball Company) (1) Schedule to compute correct profit: Under(over)statement in Profit 2010 2011 Omission of accrued wages 12/31/10 12/31/11 12/31/12 Omission of unused supplies 12/31/10 12/31/11 12/31/12 Omission of accrued interest income 12/31/10 Sale of equipment - Proceeds Gain on sale Recorded depreciation Omission of unearned rent Net under(over)statement Reported Profit Corrected Profit
(80,000)
32,000
80,000 (60,000)
(32,000) 25,000
18,000 (25,000) 7,000 4,200
(18,000)
(43,800) 450,000 406,200
(800) 290,000 289,200
4,200
(2) Audit adjusting entries: Retained Earnings Wages Expense
60,000
Wages Expense Wages Payable
78,000
Supplies Expense Retained Earnings
25,000
Unused Supplies Supplies Expense
22,400
Retained Earnings Accumulated Depreciation Equipment Depreciation Expense
9,600 36,600
60,000
78,000
25,000
22,400
42,000 4,200
(3) Correcting entries in 2013 Retained Earnings Wages Expense
78,000
Supplies Expense Retained Earnings
22,400
Retained Earnings Accumulated Depreciation Equipment
5,400 36,600
78,000
22,400
42,000
15
2012
RE, 1/1/12
60,000 (78,000)
(60,000)
(25,000) 22,400
25,000
4,200 (9,600) (40,000) (56,400) (44,600) 440,000 383,600
Chapter 2 Correction of Errors Problem 6 (Erasure Company) 1.
Accumulated Depreciation Depreciation Expense Retained Earnings
2.
No entry (counterbalanced)
3.
Loss on Damages Retained Earnings
4.
5.
6.
16,500 5,500 11,000
585,000 585,000
Goodwill 12,000 Retained Earnings (Note: Goodwill is not subject to amortization) Retained Earnings Sales
328,500
Retained Earnings Accumulated Depreciation Equipment
18,000 2,000
Repairs and Maintenance Equipment
30,000
328,500
20.000
30,000
Accumulated Depreciation (10% x (20,000+ 30,000) Depreciation Expense 7.
8.
12,000
5,000 5,000
Cost of Sales Retained Earnings
21,000
Cost of Sales Inventory
20,000
21,000
20,000
No entry ( no effect on cost of sales of 2011 and 2012; Cost of sales had been set up; both purchases and beginning inventory for 2012 had been transferred to cost of sales)
Problem 7 (Gloria Company) Audit adjustments to correct 2011 financial statements
Audit adjustments to correct 2012 financial statements
Other operating income Unearned commission income
Retained earnings Other operating income
8,000
Prepaid rent 16,000 Selling and administrative expenses
8,000
16,000
8,000 8,000
Other operating income 6,400 Unearned commission income
6,400
Selling and administrative expenses Retained earnings
16,000
16,000
Prepaid rent 21,000 Selling and administrative expenses
16
21,000
Chapter 2 Correction of Errors Interest receivable Other operating income
8,000 8,000
Other operating income Retained earnings
8,000
Interest receivable Interest income
12,000
Sales
90,000
8,000
12,000
Advances from customers Cost of sales Accounts payable
15,000
Equipment Selling and administrative expenses
20,000
Selling and administrative expenses Accumulated depreciation
15,000
20,000
2,000 2,000
90,000
Retained earnings Cost of sales
15,000
Equipment Retained earnings Accumulated depreciation
20,000
Selling and administrative expenses Accumulated depreciation
4,000
15,000
18,000 2,000
4,000
(a) Gloria Company Comparative Statements of Comprehensive Income For the Years Ended December 31, 2012 and 2011
Sales Cost of Sales Gross Profit Other Operating Income Total Income Less: Selling and Administrative Expenses Net Income from Operations Interest Expense Net Income
P P P P P
(b) Effect on total assets, December 31, 2011 (see audit adjusting entries for 2011) = 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated
(c) Effect on total assets, December 31, 2012 (see audit adjusting entries for 2012) = 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated. (d) Effect on total liabilities, December 31, 2012 (see audit adjusting entries for 2012) = 6,400 + 90,000 = 96,400 understated
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2012 910,000 585,000 325,000 73,600 398,600 279,000 119,600 80,000 39,600
P P P P P
2011 720,000 465,000 255,000 30,000 285,000 156,000 129,000 20,000 109,000
Chapter 2 Correction of Errors Problem 8 Golden Crest
Particulars Omission of unused supplies 12/31/11 12/31/12 Repairs charged to equipment on 1/1/10 AFS securities were measured at cost Correct cost of equipment, P746,070 Recorded cost 900,000 Difference 153,930 Difference in depreciation 2011 153,930/10 x 3/12 = 3,848 2012 153,930 / 10 =15,393 Interest expense 2011 P255,393 x 3/12 = Net under (overstatement)
2011 Profit
Retained earnings, Dec. 31, 2011
15,000
15,000
(8,500)
(68,000)
Non- current Assets, 12/31/12
Retained earnings January 1, 2011
(59,500) 50,000
(76,500)
(153,930) 3,848
3,848
(63,848) (53,500)
(63,848) (113,000)
Present value of the note on October 1, 2011 = 300,000 x 2.4869 = 746,070 Amortization table for the note payable Date Periodic Payment Applied to Interest October 1, 2011 September 30, 2012 300,000 74,607 September 30, 2013 300,000 52,068 Problem 9 (Golden Harvest Corporation) (a) Computation of correct profit (loss) Particulars Omissions of Accrued expenses, 12/31/11 12/31/12 12/31/13 Accrued income 12/31/11 12/31/12 12/31/13 Prepaid expenses 12/31/11 12/31/12 12/31/13 Unearned income 12/31/11 12/31/12 12/31/13 Omission in the ending inventory 2012 2013 Machine charged to expense on August 31, 2011 Depreciation on the machine Net understatement (overstatement) Reported profit (loss) Correct profit (loss)
Applied to Principal 225,393 247,932
2012
(20,000)
20,000 (25,000)
12,000
(15,000)
80,000 (3,333) 85,667 (250,000) 164,333
18
(144,182)
2011
32,000
Computation of retained earnings
3,848 15,393
(32,000) 30,000 (12,000) 18,000 15,000 (10,000)
(76,500)
Bal. of Principal 746,070 520,677 272,745
2013
25,000 (30,000) (30,000) 26,000 (18,000) 24,000 10,000 (8,000)
28,000
(28,000) 64,000
(10,000) 22,000 320,000 342,000
(10,000) 25,000 380,000 405,000
Chapter 2 Correction of Errors 2011 P 0 (164,333)
Balance, January 1 Profit (loss) Dividends declared Balance, December 31
P(164,333)
2012 P(164,333) 342,000 (60,000) P117,667
2013 P117,667 405,000 (100,000) 422,667
(b) 2013 Audit Adjusting Entries Retained Earnings Operating Expenses
25,000
Operating Expenses Accrued Expenses
30,000
Income Retained Earnings
30,000
Accrued Income Income
26,000
Expenses Retained Earnings
18,000
Prepaid Expenses Expenses
24,000
Retained Earnings Income
10,000
25,000
30,000
30,000
26,000
18,000
24,000
10,000
Income Unearned Income
8,000 8,000
Inventory, beginning/Cost of Sales Retained Earnings
28,000
Inventory, end Income Summary/ Cost of Sales
64,000
Machinery Operating Expenses Retained Earnings Accumulated Depreciation
80,000 10,000
28,000
64,000
66,667 23,333
Problem 10 (Sukiyaki Corporation) 2011 Audit Adjustments to restate 2011 FS
Other Operating Expenses – Unrealized Loss on Trading Sec. Held for Trading Equity Securities
Audit Adjustments to Restate 2012 FS Allowance for Doubtful Accounts 5,000 Operating Expenses 32,000 – 37,000 = 5,000
3,000 3,000
19
Held for Trading Equity Securities 7,000 Retained Earnings 3,000 Other Operating Income – Unrealized Gain on Trading Sec.
5,000
10,000
Chapter 2 Correction of Errors Cost of Sales Merchandise Inventory
8,900 8,900
Equipment Operating Expenses
36,000
Operating Expenses Accumulated Depreciation (36,000 -6,000)/10
3,000
36,000
3,000
Retained Earnings Cost of Sales
8,900
Cost of Sales Merchandise Inventory
13,600
Equipment Retained Earnings
36,000
Retained Earnings Operating Expenses Accumulated Depreciation
3,000 3,000
8,900
13,600
36,000
6,000
Accumulated Depreciation 20,000 Equipment Other Operating Income – Gain on Sale of Equipment Prepaid Insurance Operating Expenses Retained Earnings
6,000 3,000 9,000
Prepaid Insurance Operating Expenses Retained Earnings
2012 P1,000,000 434,700 P 565,300 3,000 10,000 578,300 (351,000) P227,300
6,000
2011 P900,000 403,900 P 496,100 ________ 496,100 (280,000) (3,000) P 213,100
Sukiyaki Corporation Statement of Financial Position December 31, 2012 and 211 2012 Current Assets Cash Held for Trading Equity Securities Accounts Receivable, net Merchandise Inventory Prepaid Expenses Total Current Assets Non-Current Assets Property, Plant and Equipment, net of Acc. Deprn Total Assets
20
3,000
3,000 3,000
Sukiyaki Corporation Statement of Comprehensive Income For the Years Ended December 31, 2012 and 2011
Sales Cost of Sales Gross Profit Gain on Sale of Equipment Unrealized Gain on Trading Securities Total Income Operating Expenses Unrealized Loss on Trading Securities Profit
17,000
2011
P183,000 85,000 360,000 193,400 3,000 P 824,400
P 2,000 75,000 278,000 193,100 6,000 P554,100
P 78,400 P902,800
P 96,100 P650,200
Chapter 2 Correction of Errors Current Liabilities Accounts Payable
P121,400
P196,100
Shareholders’ Equity Ordinary Share Share Premium Retained Earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity
P260,000 20,000 501,400 P781,400 P902,800
P180,000 0 274,100 P 454,100 P650,200
Cash Flow Statement For the Year Ended December 31, 2012
Cash Flow From Operating Activities Collection from customers Payment to Suppliers Payment for expenses Net cash flow from operations Cash Flow From Investing Activities Sale of equipment Purchase of equipment Net cash flow from investing activities Cash Flow From Financing Activities Issue of ordinary share (80,000 + 20,000) Increase in cash Cash Balance, January 1, 2007 Cash Balance, December 31
P904,000 (509,700) (315,800) P78,500 P 3,000 ( 500) 2,500 100,000 P181,000 2,000 P183,000
Computations: Accounts Receivable Allowance for Uncollectible Accounts AR, Net
2012 P392,000 32,000 P360,000
2011 P296,000 18,000 P278,000
Property, Plant and Equipment Cost Accumulated Depreciation Carrying value
P186,000 107,600 P 78,400
P205,500 109,400 P 96,100
Accounts Receivable, beg. Sales Accounts Receivable, end Collections from customers
P296,000 1,000,000 (392,000) P904,000
Inventory, end Cost of sales Inventory, beg. Purchases Accounts Payable, beginning Accounts Payable, end Payment to suppliers
P193,400 434,700 (193,400) P434,700 196,100 (121,400) P509,700
21
Chapter 2 Correction of Errors Accumulated depreciation, end Accumulated depreciation of equipment sold Accumulated depreciation, beg. Depreciation expense
P107,600 20,000 (109,400) P18,200
Operating expenses Depreciation Doubtful accounts expense 32,000 – 18,000 Decrease in prepaid expenses Operating expenses paid
P351,000 ( 18,200) ( 14,000) ( 3,000) P315,800
Property, Plant and Equipment, cost, end Cost of equipment sold Property, plant and equipment, cost, beg. Equipment purchased
P186,000 20,000 (205,500) P 500
Problem 11 (Tahoma Corporation) Adjusting Entries – December 31, 2012 Sales
100,000 Retained Earnings
100,000
Accounts Receivable Sales
250,000
Retained Earnings Purchases
175,000
Purchases Accounts Payable
140,000
250,000
175,000
140,000
Sales
20,000 Unearned Revenue
20,000
Retained Earnings Expenses
35,000 35,000
Expenses Accrued Expenses
50,000
Inventory, beginning Retained Earnings
75,000
Inventory, end Income Summary
110,000
50,000
75,000
110,000
Advances to Suppliers Purchases
50,000 50,000
Retained Earnings Expenses Accumulated Depreciation – Printing Equipment
3,333 10,000 13,333
22
Chapter 2 Correction of Errors Expenses Retained Earnings Accumulated Depreciation – Building
37,500 12,500
Expenses Allowance for Uncollectible Accounts
25,000
50,000
25,000
Interest Expense (500,000 x 12% x 8/12) 40,000 Retained Earnings (500,000 x 12% x 4/12) 20,000 Operating Expenses 60,000 (Note: 2 semi-annual payments were made in 2012; both were charged to operating expenses, balance of Mortgage payable before the annual payment in August 2012 is 450,000 + 50,000) Interest Expense Interest Payable 450,000 x 12% x 4/12
18,000 18,000
Tahoma Company Statement of Comprehensive Income For the Year Ended December 31, 2012 Sales Cost of Sales Inventory, January 1 Purchases Inventory, Dec. 31 Cost of Sales Gross Profit Selling and Administrative Expenses Profit before interest expense Interest expense Profit
P 2,180,000 75,000 915,000 (110,000) 880,000 1,250,000 777,500 472,500 58,000 414,500 Tahoma Company Statement of Financial Position December 31, 2012
Assets Current Assets Cash Accounts receivable, net of allowance for uncollectible accounts of P25,000 Advances to suppliers Inventory Total current assets Non-current assets Land Building, net of P50,000 accumulated depreciation Printing equipment, net of P13,333 accumulated depreciation Total property, plant and equipment Total assets
23
P 750,000 225,000 50,000 110,000 P1,135,000 P 400,000 700,000 86,667 P1,186,667 P2,321,667
Chapter 2 Correction of Errors Liabilities and Shareholders’ Equity Current Liabilities Accounts payable Accrued expenses Current portion of mortgage payable Interest payable Unearned revenue Total current liabilities
P 140,000 50,000 50,000 18,000 20,000 P278,000
Non-current liabilities Mortgage payable, net of current portion Total liabilities
P 400,000 P 678,000
Shareholders’ Equity Ordinary share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity
P 1,000,000 *643,667 P 1,643,667 P2,321,667
*Retained earnings, January 1, 2012 before adjustment Correction of prior period errors Profit for 2012 Retained earnings, December 31, 2012
P 300,000 ( 70,833) 414,500 P 643,667
Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.. 14. 15.
A C A A B A A B B D B B C B A
16. 17. 18. 19 20.
D C C A
700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000 -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 ) - 29,000 – 15,000 + 22,000 = (22,000) 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000 (300,000) + (50,000) + 100,000 = (250,000) - 16,000 – 15,000 – 10,000 + 10,800 = (30,200) - 15,000 + 10,800 = (4,200) 5,000,000 – 200,000 – 150,000 = 4,650,000 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 = 1,700,000 200,000 / 5 155,000 + 1,000 – 8,000 + 12,000 – 5,500 – 10,000 = 144,500 3,000,000 – 400,000 = 2,600,000 Profit is understated by 7,000 + 3,000; RE is understated by P3,000; P7,000 has been counterbalanced. 50,400 / 9 = 5,600 54,000 – 11,200 = 42,800 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement -300,000 – 500,000 + 200,000 = 600,000 overstated
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