BA 123 (Velasco / Dela Cruz)

Error Correction

Problem Set 1.
Indicate the effect of each of the following errors by writing O for overstated, U for understated, and
X for no effect. Prepare adjusting entries assuming each error is discovered in 2017, 2018, and
2019.

1. The Company entered into a contract with an advertising agency to provide and develop
promotional ads for its products. On May 31, 2017, a total of P180,000 was paid to the agency
and this was booked as expenses. The ad will run for a period of one-year up to May 31, 2018.
No adjustment was made as of year-end.
2017 2018
a. Expense for the year
b. Prepaid expense at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

2. To generate additional income, the company leased a portion of the 2nd floor of its building for
P360,000 for one year ending on July 31, 2018. The amount received was reported as rental
income for 2017.
2017 2018
a. Revenue for the year
b. Unearned revenue at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

3. On August 1, 2017, the company paid P48,000 for 12 months rent in advance. As of December
31, 2017, the entire amount is included in Prepaid Expense.

2017 2018
a. Expense for the year
b. Prepaid expense at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

4. A real account was credited when revenue of P120,000 for one year was received in advance on
May 1, 2017. No adjusting entry was made as of December 31, 2017. The entire amount of
P120,000 received in advance in 2017 was charged to revenue in 2018

2017 2018
a. Revenue for the year
b. Unearned revenue at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

5. On October 1, 2017, the company issued at face value P1,200,000, 12% bonds, paying interest
semi-annually on October 1 and April 1. No accrual of interest was made as of year-end.
 2017 2018
a. Expense for the year
b. Accrued liability at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

6. On October 1, 2017, the company purchased at par P100,000 of 8% corporate bonds. The bonds
were dated October 1, 2017, and pay interest semi-annually. No accrual of interest was made as
of year-end.

2017 2018
a. Revenue for the year
b. Interest receivable at the end of the year
c. Net income for the year
d. Retained earnings year-end, before closing
e. Retained earnings year-end, after closing

7. Denise Company reported the following net income figures:

2016 P120,000
2017 130,000

In the determination of the net income figures, the following items were ignored:

2016 2017
Prepaid expense 2,000 3,000
Accrued salaries 1,000 4,000
Unearned rental income 5,000 9,000
Accrued interest receivable 6,000 8,000

a. Determine the corrected net income for 2016 and 2017 assuming no tax impact.
b. Determine the corrected net income for 2016 and 2017 assuming income tax of 30%.
Problem 2.
Strontium Corporation asked you to review its records and prepare corrected financial statements.
The books of accounts are in agreement with the following statement of financial position.

Strontium Corporation
Statement of Financial Position
December 31 2018
Assets
2018 2017
Cash Php 40,000 Php 35,000
Accounts Receivable 80,000 76,000
Notes Receivable 24,000 20,000
Inventories 200,000 150,000
Total Assets Php 344,000 Php 281,000

Liabilities and Owner’s Equity

Accounts Payable Php 16,000 Php 15,000
Notes Payable 32,000 30,000
Capital Stock 80,000 80,000
Retained Earnings 216,000 156,000
Total Liabilities and Owners Equity Php 344,000 Php 281,000

A review of the company’s books indicates that the following errors and omissions had not been
corrected during the applicable years.

2016 2017 2018

Prepaid Expense 5,600 4,000 4,800
Unearned Income 3,200 - 2,400
Accrued Expense 600 800 400
Accrued Income 1,000 - 1,200

No Dividends were declared during the years 2007 to 2018 and no adjustments were made to
retained earnings. The company’s books reported the following profit. For the purposes of this
problem, assume a 30% tax rate and ignore deferred taxes.

2016 Php 44,000

2017 Php 52,000
2018 Php 60,000

Required:
1. Determine the cumulative impact of the impact of all errors. Use the following table as guide:
2016 2017 2018
Revenues
Expenses
Income before Tax
Tax Expense
Net Income
Retained Earnings,
beg
Retained Earnings,
end

2. Prepare the necessary correcting entries as of December 31, 2018.

 3. Determine the correct profit or loss for 2016, 2017 and 2018.
4. Prepare comparative financial statements by:
a. For 2018 Balances – post the necessary correcting entries as a result of 2018 audit.
b. For 2017 Balances – prepare and post the necessary working paper entries as a
result of the material omissions uncovered by the 2018 audit.

Problem 3. Comparative Financial Statements.

You were engaged by Manganese Company to audit its 2018 financial statements. The unaudited
financial statements are presented below:

MANGANESE COMPANY
Balance Sheet
DECEMBER 31
2018 2017
Cash 180,000 100,000
Accounts receivable 320,000 215,000
Allowance for doubtful accounts (20,000) (15,000)
Inventory 220,000 150,000
Property and equipment 700,000 600,000
Accumulated depreciation (300,000) (200,000)
1,000,000 850,000

Current liabilities 150,000 120,000

Long-term liabilities 210,000 350,000
Capital stock 300,000 250,000
Retained earnings 340,000 130,000
1,000,000 850,000

MANGANESE COMPANY
Income Statement
DECEMBER 31
2018 2017
Net sales 10,100,000 7,100,000
Cost of sales 7,100,000 4,900,000
Gross profit 3,000,000 2,200,000
Operating expenses 2,790,000 2,080,000
Income before tax 210,000 120,000
Income tax - -
Net income 210,000 120,000
Retained earnings, beginning 130,000 10,000
Retained earnings, ending 340,000 130,000

The following are the audit findings:

1. 2018 sales were recorded in 2017 10,000
2. Unearned income error under current liabilities:
a. 2018 overstated 6,000
b. 2017 understated 4,000
3. Accrued expenses not recorded:
a. 2018 7,000
b. 2017 2,000
4. 2017 depreciation understated by P5,000.
5. The new accountant does not know how to compute for income tax. Beginning 2017, income tax
were neither accrued or paid. All income tax liabilities prior to 2017 were appropriately
paid and recorded. Assume a tax rate of 30%.

Instructions: Prepare the following:

1. Correcting entries as of December 31, 2018
2. Working paper entries to restate the December 31, 2017 balances.
3. Comparative 2018 and 2017 financial statements.