Accounting for Correction of Errors

Exercises

1. On November 1, 2016, Bacon Saver Company paid P10,800 to renew its insurance policy
for 3 years. On December 31, 2016, Bacon Saver’s unadjusted trial valance showed a
balance of P270 for prepaid insurance and P13,230 for insurance expense. What
amounts should be reported for prepaid insurance and insurance expense in Bacon
Saver’s December 31, 2016 financial statements?
Prepaid Insurance Insurance Expense
P 10,200 P 3,300
2. An analysis of Bat Corporation’s unadjusted prepaid expense account at December 31,
2016 revealed the following:

• An opening balance at P6,000 for Bat comprehensive insurance policy. Bat had paid
an annual premium of P12,000 on July 1, 2015.
• A P12,800 annual insurance premium payment made July 1, 2016.
• A P8,000 advance rental payment for a warehouse Bat leased for 1 year beginning
January 1, 2016.

In its December 31, 2016 balance sheet, what amount should Bat report as prepaid
expenses? P6,400

3. On October 1, 2016, a company sold services to a customer and accepted a note in

exchange with a P120,000 face value and an interest rate of 10%. The note requires
that both the principal and interest be paid at the maturity date, December 1, 2017.
The company’s accounting period is the calendar year. What adjusting entry (related to
this note) will be required at December 31, 2016 on the company’s books?

a. Deferred interest income 3,000

Interest receivable 3,000
b. Interest income 3,000
Interest receivable 3,000
c. Interest receivable 3,000
Deferred interest income 3,000
d. Interest receivable 3,000
Interest income 3,000

4. What is the purpose of the following entry?

Supplies xxxx
Supplies expense xxxx

a. To recognize supplies used, if purchases of supplies are recorded in supplies.

b. To recognize supplies on hand, if purchases of supplies are recorded in
supplies expense.
c. To record the purchase of supplies during or at the end of the period.
d. To close the expense account for supplies at the end of the period.

5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry
could be made on January 1?
a. Wages expense 15,000

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 Wages payable 15,000
b. Prepaid expense 15,000
Wages expense 15,000
c. Wages expense 15,000
Prepaid wages 15,000
d. Wages payable 15,000
Wages expense 15,000

6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance
was debited. Assuming a December 31 year-end, what is the reversing entry at the
beginning of the next period?
a. None is required.
b. Cash 6,000
Prepaid insurance 6,000
c. Prepaid insurance 5,500
Insurance expense 5,500
d. Insurance expense 500
Prepaid insurance 500

7. A consulting firm started and completed a project for a client in December 2016. The
project has not been recorded on the consulting firm’s books, and the firm will not
receive payment from the client until February 2017. The adjusting entry that should be
made on the books of the consulting firm on December 31, 2016, the last day of the
firm’s fiscal year, is
a. Cash in transit xxx
Consulting revenue xxx
b. Consulting revenue receivable xxx
Consulting revenue xxx
c. Unearned consulting rev. xxx
Consulting revenue xxx
d. Consulting revenue receivable xxx
Unearned consulting revenue xxx

8. Boo Koo Company sublet a portion of its warehouse for 5 years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Boo
Koo recorded as a credit to calendar-year basis. The adjustment on December 31 of the
first year should be
a. No Entry.
b. Unearned rental income 2,500
Rental income 2,500
c. Rental income 2,500
Unearned rental income 2,500
d. Unearned rental income 12,500
Rental income 12,500

9. After a successful drive aimed at members of a specific national association, BOXer

Company received a total of P180,000 for 3-year subscriptions beginning April 1, 2016,
and recorded this amount in the unearned revenue account. Assuming BOXer records
adjustment only at the end of the calendar year, the adjusting entry required to reflect
the proper balances in the accounts at December 31, 2016 is to
a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000.
b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000.
c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000.

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 d. Debit unearned revenue for P45,000 and credit subscription revenue for
P45,000.

10. The Calculator Corporation renewed an insurance policy for 3-years beginning July 1,
2016 and recorded the P81,000 premium in the prepaid insurance accounts. The
P81,000 premium represents an increase of P23,400 from the P57,600 premium charged
3 years ago. Assuming The Calculator'’ records its insurance adjustments only at the
end of the calendar year, the adjusting entry required to reflect the proper balances in
the insurance accounts at December 31, 2016, The Calculator’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for
P23,100.

11. The 2016 financial statements of Carrotweight Company reported net income for the
year ended December 31, 2016 of 2 million. On July 1, 2017, subsequent to the
issuance of the 2016 financial statements, Carrotweight changed from an accounting
principle that is not generally accepted to one that is generally accepted. If the generally
accepted accounting principle had been used in 2016, net income for the year ended
December 31, 2016 would have been decreased by 1 million. On August 1, 2017,
Carrotweight discovered a mathematical error relating to its 2016 financial statements.
If this error had been discovered in 2016, net income for the year ended would have
been increased by P500,000.

What amount, if any, should be included in net income for the year ended December 31,
2017 because of the items noted above?
a. P 0 c. P 500,000 increase
b. P 500,000 decrease d. P 1,000,000 decrease

12. Cheepcheepcheep Company reported a retained earnings balance of P400,000 at

December 31, 2015. In August 2016, Cheepcheepcheep determined that insurance
premiums of P60,000 for the 3-year period beginning January 1, 2015 had been paid
and fully expensed in 2015. Cheepcheepcheep has a 30% income tax rate.

What amount should Cheepcheepcheepreport as adjusted beginning retained earnings in

its 2016 statement of retained earnings? P 428,000

13. Cockadoodledoo Corporation failed to accrue warranty costs of P50,000 in its December
31, 2015 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2016 resulted in a cumulative effect of P30,000
on Cockadoodledoo’s retained earnings. Both the P50,000 and P30,000 are net of
related income taxes.

What amount should Cockadoodledoo report as prior period adjustments in 2016?

P 50,000

Questions 14 and 15 are based on the following information.

On October 1, 2016, Dinoster Retailers signed a 4-month, 16% note payable to finance
the purchase of holiday merchandise. At that date, there was no direct method of pricing
the merchandise, and the note’s market rate of interest was 11%. Dinoster recorded the
purchase at the note’s face amount. All of the merchandise was sold by December 1,

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 2016. Dinoster’s 2016 financial statements reported interest payable and interest
expense on the note for 3 months at 16%. All amounts due on the note were paid
February 1, 2017.

14. Dinoster’s 2016 NET INCOME for the holiday merchandise was
a. Overstated by the difference between the note’s face amount and the note’s
October 1, 2016 present value.
b. Overstated by the difference between the note’s face amount and the note’s October
1, 2016 present value plus 11% interest for 2 months.
c. Understated by the difference between the note’s face amount and the note’s
October 1, 2016 present value.
d. Understated by the difference between the note’s face amount and the note’s
October 1, 2016 present value plus 11% interest for 2 months.

15. As a result of Dinoster’s accounting treatment of the note, interest, and merchandise,
which of the following items was reported correctly?

12/31/16 12/31/16
Retained earnings Interest payable
a. Yes Yes
b. No No
c. Yes No
d. No Yes

16. On December 31, 2016, Garbage Lord Corp. sold merchandise for P75,000 to Fineafle
Co. The terms of the sale were net 30, FOB shipping point. The merchandise was
shipped on December 31, 2016 and arrived at Fineafle on January 5, 2017. Because of a
clerical error, the sale was not recorded until January 2017, and the merchandise, sold
at 25% markup, was included in Garbage Lord’s inventory at December 31, 2016.

As a result, Garbage Lord’s cost of goods sold for the year ended December 31, 2016
was
a. Understated by P 75,000 c. Understated by P 15,000
b. Understated by P 60,000 d. Correctly stated

17. For the past 3 years, Gogiga Gagagigo Co. has failed to accrue unpaid wages earned by
workers during the last week of the year. The amounts omitted, which are considered
material, were as follows:

December 31, 2013 P56,000

December 31, 2015 51,000
December 31, 2016 64,000

The entry on December 31, 2016 to correct for these omissions would include a
a. Credit to wage expense for P64,000
b. Debit to wage expense for P51,000
c. Debit to wage expense for P13,000
d. Credit to retained earnings for P64,000

18. An audit of Humpty Grumpty Co. for 2016, its first year of operations, detected the
following errors made at December 31, 2016:

Failed to accrue P50,000 interest expense

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 Failed to record depreciation expense on office equipment of P80,000
Failed to amortize prepaid rent expense of P100,000
Failed to delay recognition of prepaid advertising expense of P60,000

The net effect of these errors was to overstate net income for 2016 by P 170,000

19. While preparing its 2016 financial statements, Junkuriboh Corp. discovered
computational errors in its 2015 and 2014 depreciation expense. These errors resulted
in overstatement of each year’s income by P25,000, net of income taxes. The following
amounts were reported in the previously issued financial statements:
2015 2014
Retained earnings, 1/1 P 700,000 P 500,000
Net income 150,000 200,000
Retained earnings, 12/31 P 850,000 P 700,000

Junkuriboh’s 2016 net income is correctly reported at P180,000. Which of the following
amounts should be reported as prior-period adjustments and net income in Junkuriboh’s
2016 and 2015 comparative financial statements?

Year Prior period adjustment Net income

a. 2015 - P150,000
2016 P (50,000) 180,000
b. 2015 (50,000) 150,000
2016 - 180,000
c. 2015 (25,000) 125,000
2016 - 180,000
d. 2015 - 125,000
2016 - 180,000

20. The following information appeared on Lala Li-Oon Inc.’s December 31 financial
statements:
2015 2016
Assets P 1,000,000 P1,200,000
Liabilities 750,000 800,000
Contributed capital 120,000 120,000
Dividends paid 100,000 60,000

In preparing its 2016 financial statements, Lala Li-Oon discovered that it had misplaced
a decimal in calculating depreciation for 2015. This error overstated 2015 depreciation
by P10,000. In addition, changing technology had significantly shortened the useful life
of Lala Li-Oon’s computers. Based on this information, Lala Li-Oon determined that
depreciation should be P30,000 higher in 2016 financial statements.

Assuming that no correcting or adjusting entries have been made and ignoring income
taxes, how much should Lala Li-Oon report as 2016 net income? P 180,000

Questions 21 and 22 are based on the following information.

An audit of Angelina Company has revealed the following four errors that have occurred
but have not been corrected:

• Inventory at December 31, 2015-P40,000, understated

• Inventory at December 31, 2016-P15,000, overstated

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 • Depreciation for 2015-P7,000, understated
• Accrued expenses at December 31, 2016-P10,000, understated

21. The errors cause the reported net income for the year ending December 31, 2016 to be
a. Overstated by P72,000 c. Understated by P28,000
b. Overstated by P65,000 d. Understated by P45,000

22. The errors cause the reported retained earnings at December 31, 2016 to be
a. Overstated by P65,000 c. Overstated by P25,000
b. Overstated by P32,000 d. Understated by P18,000

23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to
cash of P50,500 and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500

24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect c. Is understated by P9,000
b. Is overstated by P9,000 d. Is understated by P23,000

25. The beginning accumulated depreciation per record was P100,000. During the year, the
firm sold one of its machines recorded as follows:
Cash 270,000
Accumulated depreciation - machine 30,000
Machine 300,000

If the actual cash proceeds is P300,000, the correcting entry would be:
a. Cash 300,000
Machine 300,000
b. Cash 30,000
Gain on sale of machine 30,000
c. Accumulated depreciation - machine 30,000
Gain on sale of machine 30,000
d. Cash 300,000
Machine 270,000
Gain on sale of machine 30,000

26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s
equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.

27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when
nominal accounts were already closed to income summary, but not yet closed to the
capital account. The correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases

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 c. P2,700 credit to purchases
d. P2,700 credit to accounts payable

28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously
recorded as P56,000. The error had been discovered when all nominal and temporary
accounts were already closed to the real account. The correcting entry would require a
a. Debit to capital account c. Credit to cost of sale
b. Debit to income summary account d. Credit to owner’s capital

29. A sales discount of P5,000 was recorded as purchase discount. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P5,000 debit to purchase discount c. P5,000 credit to sales discount
b. P5,000 credit to purchase discount d. P5,000 credit to accounts payable

30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries

expense. The error had been discovered when all temporary accounts were already
closed to the capital account. The correcting entry will require a
a. P20,000 debit to owner’s capital c. P20,000 debit to salaries expense
b. P20,000 debit to owner’s drawings d. No correcting entry is necessary

31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been
discovered when nominal accounts were already closed. The correcting entry would
require a
a. P20,000 debit to rent expense c. P40,000 credit to rent income
b. P20,000 debit to rent income d. No adjustment entry is necessary

32.A cash collection of P5,000 from customer’s open account was recorded as P500. The
error had been discovered when nominal accounts were still open. The correcting entry
would require a
a. P4,500 debit to accounts receivable c. P500 credit to accounts receivable
b. P4,500 debit to cash d. P500 credit to cash

33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had
been discovered when nominal accounts were already closed. The correcting would
require a
a. P900 debit to cash. c. P900 debit to sale
b. P900 debit to accounts receivable d. P900 credit to accounts receivable

34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit
to cash P5,500 and credit to notes receivable P5,500. The error had been discovered
when nominal accounts were still open. The correcting entry would require a
a. P500 debit to cash. c. P500 credit to cash
b. P500 debit to accounts receivable d. P500 credit to interest income

35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2016 with
a face value of P100,000 was not taken up as of December 31, 2014. The collection of
the note, which matured on January 31, 2017, was recorded as
Cash 102,000
Notes receivable 100,000
Interest Income 2,000

The error was discovered after collection. The correcting entry would require a
a. P2,000 debit to cash.

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 b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income

36.A return of merchandise amounting to P4,500 which was previously purchased on

account was recorded as

Accounts payable 5,400

Purchases 5,400

If the error had been discovered when the nominal accounts were still open, the
correcting entry would require a
a. P900 debit to purchase return
b. P900 debit to accounts payable
c. P900 credit to purchases
d. P900 credit to accounts payable

Problem 1
The first audit of the books of Nopenguin Company was made for the year ended December
31, 2016. In examining the books, the auditor found that certain items had been
overlooked or incorrectly handled in the last 3 years. These items are:

a. At the beginning of 2014, the company purchased a machine for P1,020,000 (salvage
value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base
for the 3 years.

b. At the end of 2015, the company failed to accrue sales salaries of P90,000.

c. A tax lawsuit that involved the year 2014 was settled late in 2016. It was determined
that the company owed an additional P170,000 in taxes related to 2014. The company
did not record a liability in 2014 or 2015 because the possibility of loss was considered
remote, and charged the P170,000 to a loss account in 2016.

d. Nopenguin Company purchased another company early in 2014 and recorded goodwill of
P900,000. Nopenguin had not amortized goodwill because its value had not diminished.
The estimated economic life of the goodwill is 20 years.

e. In 2016, the company wrote off P174,000 of inventory considered to be obsolete; this
loss was charged directly to Retained Earnings.

f. Year-end wages payable of P6,800 were not recorded because the bookkeeper though
that “they were immaterial.”

g. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of P5,280 because “the amount of the check is about
the same every year.

Questions

1. The entry to record the adjustment of item “a” is:

a. Accumulated depreciation 34,000
Retained earnings 17,000

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 Depreciation expense 17,000
b. Accumulated depreciation 51,000
Retained earnings 34,000
Depreciation expense 17,000
c. Accumulated depreciation 17,000
Depreciation expense 17,000
d. Accumulated depreciation 17,000
Retained earnings 17,000

2. The entry to record the adjustment of item “c”:

a. No adjustment.
b. Retained earnings 170,000
Estimated liability 170,000
c. Loss on damages 170,000
Estimated liability 170,000
d. Loss on damages 170,000
Cash 170,000
3. Net income of 2015 is overstated by: P 73,000

4. Net income of 2016 is overstated by: P 69,400

Solution
a. Accumulated depreciation 51,000
Depreciation expense (2006) 17,000
Retained earnings (2004 & 2005) 34,000
b. Retained earnings 90,000
Salaries expense 90,000
c. No adjustment
d. No adjustment since no indication of impairment.
e. Loss on obsolete inventory 174,000
Retained earnings 174,000
f. Salaries expense 6,800
Salaries payable 6,800
g. Prepaid insurance 4,400
Insurance expense 4,400

2004 2005 2006

Item A 17,000 17,000 17,000
Item B (90,000) 90,000
Item C - - -
Item D
Item E (174,000)
Item F (6,800)
Item G ___________ __________ 4,400
Net Effect 17,000 (73,000 (69,400)

Problem 2
A CPA is engaged by the Slushy Corporation in 2016 to examine the books and records and
to make whatever corrections are necessary. An examination of the accounts discloses the
following:

a. Dividends had been declared on December 15 in 2014 and 2015 but had not been
entered in the books until paid.

b. Improvements in building and equipment of P9,600 had been debited to expense at the
end of April 2013. Improvements are estimated to have an 8-year life. The company
uses the straight-line method in recording depreciation and computes depreciation to
the nearest month.

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c. The physical inventory of merchandise had been understated by P3,000 at the end of
2014 and by P4,300 at the end of 2015.

d. The merchandise inventories at the end of 2015 and 2016 did not include merchandise
that was then in transit and to which the company had title. This shipments of P3,800
and P5,500 were recorded as purchases in January of 2016 and 2014, respectively.

e. The company had failed to record sales commissions payable of P2,100 and P1,700 at
the end of 2015 and 2016, respectively.

f. The company had failed to recognized supplies on hand of P1,200 and P2,500 at the end
of 2015 and 2016, respectively.

The Retained Earnings account showed the following postings:

Date Item Debit Credit

2014 Jan 1 Balance 81,000
Dec 31 Net income for year 18,000
2015 Jan 10 Dividends paid 15,000
Mar 6 Stock sold – excess
over par 32,000
Dec31 Net loss for year 11,200
2016 Jan 10 Dividend paid 15,000
Dec 31 Net loss for year 12,400

Questions:
1. Corrected net income of 2014 P 19,800

2. Corrected net loss of 2015 P 12,000

3. Corrected net loss of 2016 P 16,200

4. Adjusted retained earnings at December 31, 2014 P 94,600

5. Adjusted retained earnings at December 31, 2015 P 67,600

6. Adjusted retained earnings at December 31, 2016 P 51,400

Solution
2004 2005 2006
Unadjusted Net income/Loss 18,000 (11,200) (12,400)
Item B (1,200) (1,200) (1,200)
Item C 3,000 (3,000)
4,300 (4,300)
Item D – unrecorded ending inv. 3,800 (3,800)
5,500
- unrecorded purchases (3,800) 3,800
(5,500)
Item E (2,100) 2,100
(1,700)
Item F 1,200 (1,200)
___________ __________ 2,500
Adjusted net income/loss 19,800 (12,000) (16,200)
Retained earnings – beg. 81,000 94,600 67,600
Item A (15,000) (15,000)

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 Item B – error in recording improv. 9,600
- unrecorded depreciation (800) _________ ____________
Retained earnings - end 94,600 67,600 51,400

Problem 3
A partial trial balance of Quasar Corporation is as follows on December 31, 2016:
Dr.____ ____Cr.____
Supplies on hand P 13,500
Accrued salaries and wages P 7,500
Interest receivable on investments 25,500
Prepaid insurance 450,000
Unearned rent -0-
Accrued interest payable 75,000

Additional adjusting data:

a. A physical count of supplies on hand on December 31, 2016, totaled P5,500.

b. Through oversight, the Accrued Salaries and Wages account was not changed during
2016. Accrued salaries and wages on 12/31/16 amounted to P22,000.

c. The interest receivable on investments account was also left unchanged during 2016.
Accrued interest on investments amounts to P21,750 on 12/31/16.

d. The unexpired portions of the insurance policies totaled P325,000 as of December 31,
2016.

e. P140,000 was received on January 1, 2015, for the rent of a building for both 2015 and
2016. The entire amount was credited to rental income.

f. Depreciation for the year was erroneously recorded as P25,000 rather than the correct
figure of P250,000.

g. A further review of depreciation calculations of prior year revealed that depreciation of

P36,000 was not recorded. It was decided that this oversight should be corrected by a
prior period adjustment.

Questions
1. The accrued salaries and wages at year-end is: P22,000

2. How much is the adjusted salaries and wages at year-end assuming that the balance of
this account in the book is P350,000? P22,000

3. Prepaid insurance at year-end is: P 325,000

4. Supplies on hand at year-end is: P 5,500

5. Depreciation expense at year-end is:

a. Understated by P225,000
b. Overstated by P225,000
c. Understated by P261,000
d. Overstated by P261,000

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Solution
1. Supplies expense 8,000
Supplies on hand 8,000
2. Accrued salaries and wages 7,500
Salaries and wages expense 7,500
To reverse accrued salaries.
Salaries and wages expense 22,000
Accrued salaries and wages 22,000
3. Interest income 25,500
Interest receivable 25,500
To reverse accrued income.
Interest receivable 21,750
Interest income 21,750
4. Insurance expense 125,000
Prepaid insurance 125,000
5. Retained earnings 70,000
Rent income 70,000
6. Depreciation expense 225,000
Accumulated depreciation 225,000
7. Retained earnings 36,000
Accumulated depreciation 36,000

Problem 4
The before tax income for Crystal Wing Co. for 2015 was P303,000 and P232,200 for 2016.
However, the accountant noted that the following errors had been made:

1. Sales for 2015 included amounts of P114,600 which was received in cash during 2015,
but for which the related products were delivered in 2016. Title did not pass to the
purchaser until 2016.

2. The inventory on December 31, 2015, was understated by P25,920.

3. The bookkeeper in recording interest expense for both 2015 and 2016 on bonds payable
made the following entry:

Interest expense 15,000

Cash 15,000

The bonds have a face value of P250,000 and pay a stated interest rate of 6%. They
were issued at a discount of P15,000 on January 1, 2015, to yield an effective interest of
7%. (Assume that the effective yield method should be used.)

4. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2015 and 2016 for P25,500 and P30,000, respectively. The company applies a
rate of 10% to the balance in the equipment account at the end of the year in its
determination of depreciation charges.

Questions

1. The adjusted 2015 net income is: P 189,920

2. The adjusted 2016 net income is: P 294,878

3. 2015 net income is overstated by: P 113,080

4. 2016 net income is:

a. Understated by P62,678

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 b. Understated by P59,678
c. Overstated by P166,522
d. Overstated by P51,922

5. The correcting entry in item “1” is:

a. Accounts receivable 114,600
Sales 114,600
b. Sales 114,600
Accounts receivable 114,600
c. Retained earnings 114,600
Sales 114,600
d. Sales 114,600
Retained earnings 114,600

Solution
1. Retained earnings 114,600
Sales 114,600
2. Cost of sales (beg. inv) 25,920
Retained earnings 25,920
3. Retained earnings 1,450
Interest expense 1,552
Discount on bonds payable 3,002
Int. paid Int. exp. Amort. Carrying
Value
235,000
2002 15,000 16,450 1,450 236,450
2003 15,000 16,552 1,552 238,002

4. Retained earnings 25,500

Repairs expense 30,000
Equipment 55,500
Accumulated depreciation 5,100
Retained earnings 2,550
Depreciation expense 2,550
Accumulated depreciation 3,000
Depreciation expense 3,000

2002 2003
Unadjusted net income 303,000 232,200
Item 1 (114,600) 114,600
Item 2 25,920 (25,920)
Item 3 (1,450) (1,552)
Item 4 (25,500) (30,000
- error in recording depreciation 2,550 2,550
__________ 3,000
Adjusted net income 189,920 294,878

Problem 5
You have been assigned to examine the financial statements of Tachyon Company for the
year ended December 31, 2016. Below is the Balance Sheet of the company.

Current assets 700,000 Current liabilities 250,000

Non-current assets 2,000,000 Non-current liabilities 900,000
_________ Stockholders’ Equity 1,550,000
Total Assets 2,700,000 Total liabilities/SHE 2,700,000

In the course of your audit, you discover the following situations:

1. Depreciation of P16,000 for 2016 on delivery vehicles was not recorded.

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2. The physical inventory count on December 31, 2015, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Tachyon uses
periodic inventory system.

3. The physical inventory count on December 31, 2016, improperly included merchandise
with a cost of P42,500 that had been recorded as a sale on December 27, 2016.

4. A collection of P28,000 on account from a customer received on December 31, 2016

was not recorded until January 2, 2017.

5. In 2016, the company sold for P18,500 fully depreciated equipment that originally cost
P110,000. The company credited the proceeds from the sale to the Equipment account.

6. During November 2016, a competitor company filed a patent-infringement suit against

Tachyon claiming damages of P1,100,000. The company’s legal counsel has indicated
that an unfavorable verdict is probable and a reasonable estimate of the court’s award
to the competitor is P625,000. The company has not reflected or disclosed this situation
in the financial statements.

7. Tachyon has a portfolio of trading securities. No entry has been made to adjust to
market. Information on cost and market value is as follows:

COST MARKET
December 31, 2015 P 190,000 P 190,000
December 31, 2016 168,000 164,000

8. At December 31, 2016, an analysis of payroll information shows accrued salaries of

P36,600. The Accrued Salaries payable account had a balance of P48,000 at December
31, 2016, which was unchanged from its balance at December 31, 2015.

9. A large piece of equipment was purchased on January 3, 2016, for P1,600,000 and was
charged to Repairs Expense. The equipment is estimated to have a service life of 8 years
and no residual value. Tachyon normally uses the straight – line depreciation method for
this type of equipment.

10. A P75,000 insurance premium paid on July 1, 2015, for a policy that expires on June 30,
2019, was charged to insurance expense.

11. A trademark was acquired at the beginning of 2015 for P250,000. No amortization has
been recorded since its acquisition. Trademark has an economic life of 5 years.
Questions
1. Current assets at year-end is: P 691,000

2. Non-current assets at year-end is: P 3,402,500

3. Current liabilities at year-end is: P 863,600

4. Non-current liabilities at year-end is: P 900,000

5. The net income of 2016 is understated by: P 603,900

6. The total amount of fundamental error is: P 176,000

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7. Total Stockholders’ Equity at year-end is: P 2,329,900

8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment
b. Retained earnings 42,500
Cost of sales 42,500
c. Cost of sales 42,500
Retained earnings 42,500
d. Retained Earnings 42,500
Inventory 42,500
Solution
1. Depreciation expense 16,000
Accumulated depreciation 16,000
2. Cost of sales (beg. inv) 95,000
Retained earnings 95,000
3. Cost of sales 42,500
Inventory 42,500
4. Cash 28,000
Accounts receivable 28,000
5. Accumulated depreciation 110,000
Machinery 91,500
Gain on sale 18,500
6. Loss on damages 625,000
Estimated liability on damages 625,000
7. Unrealized holding loss 26,000
Marketable Securities 26,000
Market value – beg. 190,000
Market value – end 164,000
Unrealized holding loss 26,000
8. Salaries payable 48,000
Salaries expense 48,000
To reverse accrued salaries.
Salaries expense 36,600
Salaries payable 36,600
9. Equipment 1,600,000
Repairs expense 1,600,000
Depreciation expense 200,000
Accumulated depreciation 200,000
10. Insurance expense 25,000
Prepaid insurance 37,500
Retained earnings 62,500
11. No amortization since no information about its impairment.

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