Problem 1
2019 Profit 2020 Profit
a. Understated Overstated
b. Overstated Understated
c. Overstated Understated
d. Understated Overstated
e. No Effect No Effect
f. Overstated No Effect
g. No Effect No Effect
h. Overstated Understated
i. Overstated Understated
j. Understated Overstated
k. Overstated Understated
Problem 2
Solution Guide: (EI overstated – COS understated – NI overstated – Adj. Deduct NI)
(EI understated – COS overstated – NI understated – Adj. Add NI)
(Ending Inventory last year becomes Beginning Inventory next year)
2015 2016 2017 2018 2019 2020
Reported 500,000 520,000 540,000 560,000 580,000 600,000
Net Income
2015 Adj. (50,000) 50,000
2016 Adj. (90,000) 90,000
2017 Adj. 110,000 (110,000)
2018 Adj.
2019 Adj. 20,000 (20,000)
2020 Adj. (100,000)
Adjusted 450,000 480,000 740,000 450,000 600,000 480,000
Net Income
Problem 3 Error Correction or Adjustments
2019 Profit 2020 Profit 2020 CA 2020 RE
Understatement of 2019 Ending Inventory 48,000 (48,000)
Overstatement of 2020 Ending Inventory (40,500) (40,500) (40,500)
Understatement of 2019 Depreciation Expense (11,500) (11,500)
3-year Insurance Premium for 2019, 2020 and 2021 220,000 (110,000) 110,000 110,000
Unrecorded sale of machinery in 2020 75,000 75,000 75,000
Net Adjustments 256,500 (123,500) 144,500 133,000
Note: 2020 RE Effect is the combined 2019 and 2020 adjustment.
Problem 4
2019 2020
Reported profit 195,000 210,000
Overstatement of 2019 ending inventory (36,000) 36,000
Understatement of accrued expense in 2019 (40,000) 40,000
Unrecorded supplied in 2020 15,000
Correct Profit 119,000 301,000
Problem 5
2019 Profit 2020 Profit 2020 RE
Overstatement of ending inventory in 2019 (15,000) 15,000 P0
Understatement of ending inventory in 2020 P0 5,000 5,000
Overstatement of depreciation expense in 2019 12,500 P0 12,500
Understatement of depreciation expense in 2020 P0 (4,000) (4,000)
Adjustments (2,500) 16,000 13,500
Problem 6
2019 2020
Reported net income 487,500 550,000
a. 15,500 / 5 = 3,100 12,400 (3,100)
b. (195,000 - 178,250) (16,750)
(178,250 - 202,500) 24,250
c. (980,000 x 10%) – 92,500 (5,500)
d. 2019 EI overstatement (37,750) 37,750
2029 EI overstatement (49,500)
e. Dep. = (75,000 – 12,500) / 10 = 6,250 68,750 (6,250)
Correct Profit 514,150 547,650
Problem 7
2019 2020
Reported Profit 145,000 185,000
a. Rent income in 2020 recorded in 2019 (6,500) 6,500
b. 2018 understatement of supplies (6,500)
2019 understatement of supplies 3,700 (3,700)
2020 understatement of supplies 7,100
c. 2018 understatement of accrued salaries 5,500
2019 understatement of accrued salaries (7,500) 7,500
2020 understatement of accrued salaries (4,700)
Correct Profit 133,700 197,700
Problem 8
Inventory Accounts Payable Net Sales
(Physical Count)
Initial amounts 1,750,000 1,200,000 8,500,000
Adjustments - Increase
(Decrease)
a. No shipment yet (35,000)
b. Purchase - FOBSP 50,000 50,000
c. Inventory outside the entity 20,000
d. Goods sold 26,000 (40,000)
subject to inspection
e. Inventory in transit sold – 25,000
FOBD, sale not yet recorded
f. Inventory not included 30,000
g. Unrecorded accounts payable 60,000
h. Freight-in cost 2,000 4,000
Adjusted amounts 1,903,000 1,314,000 8,425,000
Problem 9
2018 2019 2020
Reported profit (loss) 490,000 670,000 (320,000)
a. Failure to records accrued expenses
2018 (34,000) 34,000
2019 (28,000) 28,000
2020 (43,000)
b. Overstated ending inventory
2018 (63,000) 63,000
2019 (28,000) 28,000
2020 (36,000)
c. Failure to record accrued interest revenue
2018 12,000 (12,000)
2019 6,000 (6,000)
2020 8,000
d. Failure to recognize unearned rent
2018 (24,000) 24,000
2019 (20,000) 20,000
2020 (18,000)
e. Failure to record purchases on account
2018
2019 (25,000) 25,000
2020 (20,000)
f. Repairs expense erroneously capitalized
2018
2019 (120,000 – 12,000) (108,000)
2020 (80,000 – 8,000) (72,000)
g. Failure to recognize prepaid expense
2018 4,800 (4,800)
2019 6,200 (6,200)
2020 7,800
Correct profit 385,800 577,400 404,400
