PROBLEM 1.
The LOVE COMPANY was organized on January 1, 2017 and since its inception has
not recognized accruals and deferrals. Selected accounts revealed the following
information.
Accruals and deferrals not
2017 2018 2019
recognized at Year-end
Prepaid expenses 29,000 30,000 34,000
Unearned revenues 20,000 28,000 15,000
Accrued expenses 27,500 25,000 27,000
Accrued revenues 42,500 45,000 41,000
Love Company reported the following profit (loss):
Year Profit (Loss)
2017 240,000
2018 (120,000)
2019 200,000
REQUIRED:
Compute the corrected profit for each of the years 2017, 2018 and 2019 and
prepare audit adjusting entries to correct the financial statements for the year
ended December 31, 2019. Follow the format provided below:
Retained
Under (Over) statement in
Nature Earnings 2019 Accounts Affected
Profit of
of error 1/1/2019
2017 2018 2019 Account Dr. Cr.
PROBLEM 2
The profit or loss section of the statement of comprehensive income of Dragon Ball
Company for the years ended December 31, 2017, 2018, and 2019 indicates the
following profit figures: P450,000, P290,000 and P440,000 in 2017, 2018, and 2019,
respectively.
An examination of the accounting records of the Dragon Ball Company for these years
indicates that several errors were made in arriving at the profit amounts reported. The
following errors were discovered:
a. Wages earned by workers but not paid at December 31, were consistently
omitted from the records. The amounts omitted were:
December 31, 2017 P80,000
December 31, 2018 60,000
December 31, 2019 78,000
Chapter 2
Misstatements in the Fianncial Statements
Homework
b. Unused office supplies were overlooked at the end of each year as follows:
2017 P32,000
2018 25,000
2019 22,400
c. Interest receivable in the amounts of P18,000 was not recordd on December 31,
2017. Interest income was recorded when collected in 2018.
d. On January 2, 2017, a piece of equipment costing P42,000 was sold for P25,000.
At the date of sale, the equipment had accumulated depreciation of P24,000.
The cash received was recorded as Miscellaneous Income in 2017. In addition,
depreciation was recorded for this equipment in 2017, 2018, and 2019 at the rate
of 10% of cost.
e. Rental of P60,000 on an equipment, applicable for six months, was received on
October 31, 2019. The entire amount was recorded as revenue upon receipt and
no adjustment was made at the end of 2017.
REQUIRED:
1. Prepare a schedule showing the correctered profit amounts for the years
ended December 31, 2017, 2018, and 2019. Each correction of the amount
originally reported should be clearly labeled.
2. Prepare audit adjusting entries to correct the 2019 financial statements.
3. Assume that the books of Dragon Ball Company for 2019 have already
been closed. Propose correctng entries in the books of Dragon Ball during
the year 2020.
PROBLEM 3.
Sukiyaki Corporation is in the process of negotiating a loan for expansion purposes. Its
books and records have never been audited and the bank has requested that an audit
be performed. Sukiyaki has prepared the comparative financial statements for the
years ended December 31, 2018 and 2019, as shown in the next page.
During the course of the audit, the following additional facts were determined:
1. An analysis collections and losses on accounts receivable during the past 2
years indicating a drop in anticipated losses due to bad debts. After consultation
with management, it was agreed that the allowance for doubtful accounts should
be P32,000 at December 31, 2019.
2. An analysis of equity securities held for trading revealed fair values as follows:
December 31, 2018 P75,000
December 31, 2019 85,000
Chapter 2
Misstatements in the Fianncial Statements
Homework
3. The merchandise inventory as of December 31, 2018 was overstated by P8,900
and the merchandise inventory at December 31, 2019 was overstated by
P13,600.
4. On January 2, 2018, equipment costing P36,000 (estimated useful life of 10
years and residual value of P6,000) was incorrectly charged to selling expenses.
Sukiyaki uses the straight-line depreciation method. In 2019, fully depreciated
equipment (with no residual value) that originally cost P20,000 was sold as scrap
for P3,000. The company credited the proceeds of P3,000 to the equipment
account.
5. An analysis of 2017 operating expenses revealed that Sukiyaki charged to
expenses a 4-year insurance premium of P12,000 on January 2, 2017. No
adjusting entries were made at the end of 2017, 2018 and 2019.
SUKIYAKI CORPORATION
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 2019 AND 2018
2019 2018
ASSETS
Current assets
Cash P 183,000 P 2,000
Held for trading equity securities, at cost 78,000 78,000
Accounts receivable, net of allowance for
doubtful accounts of P37,000 in 2019 and
P18,000 in 2018) 355,000 278,000
Merchandise inventory 207,000 202,000
Total current assets 823,000 560,000
Non-current assets
Property, plant and equipment, net of
accumulated depreciation of P121,600 in
2019 and P106,400 in 2018) 45,400 63,100
Total non-current assets 45,400 63,100
TOTAL ASSETS P 868,400 P 623,100
LIABILITIES AND EQUITY
Accounts payable P 121,400 P 196,100
Shareholders’ equity 747,000 427,000
TOTAL LIABILITIES AND EQUITY P 868,400 P 623,100
Chapter 2
Misstatements in the Fianncial Statements
Homework
SUKIYAKI CORPORATION
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
Share Share Retained
Capital Premium Earnings
Balances at January 1, 2018 P 180,000 P - P 68,000
Profit for 2018 - - 195,000
Dividends declared and paid - - (16,000)
Balance at December 31, 2018 180,000 - 247,000
Issuance of 8,000 shares P10 par at
P12.50 per share 80,000 20,000 -
Profit for 2019 - - 220,000
Balance at December 31, 2019 P 260,000 P 20,000 P 467,000
SUKIYAKI CORPORATION
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
2019 2018
SALES P 1,000,000 P 900,000
COST OF SALES 430,000 395,000
GROSS PROFIT 570,000 505,000
OPERATING EXPENSES 350,000 310,000
NET INCOME P 220,000 P 195,0000
REQUIRED:
1. Corrected amount of comprehensive income for the years ended December
31, 2019 and 2018. Disregard income tax.
2. Corrected statement of financial position as of December 31, 2019 and
2018.
3. A statement of cash flows for the year ended December 31, 2019 using
direct method.
