Problem 16-5 (AICPA Adapted) Tower Company failed to recognize accruals and prepayments during the first year of operations. The income before tax is P5,000,000. The accruals and prepayments not recognized at the end of the year are: Prepaid insurance : 200,000 Accrued wages 250,000 Rent revenue collected in advance 300,000 Interest receivable 100,000 What is the corrected income before tax? a. 4,750,000 ~ b. 5,250,000 c.. 5,000,000 d. 4,950,000 Problem 16-6 (AICPA Adapted) Victoria Company revealed the following errors in the financial statements: . Ending inventory Depreciation 2019 200,000 understated 50,000 understated 2020 300,000 overstated 100,000 overstated At what amount should retained earnings be retroactively adjusted on January 1, 2021? 250,000 increase 250,000 decrease 400,000 decrease 200,000 decrease Se PP 418 Scanned wth G camscannerProblem 16-7 (AICPA Adapted) During 2020, Paul Company discovered that the ending inventories reported in the financial statements were incorrect by the following amounts: 2019 60,000 understated 2020 15,000 overstated The entity used the periodic inventory system to ascertain year-end quantities that are converted to peso amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income tax, what is the effect of the errors on retained earnings on January 1, 20217 a Correct b. 15,000 overstated ©. 75,000 overstated d. 135,000 overstated Problem 16-8 (IAA) Crescendo Company revealed the following'errors in the financial statements: 2019 2020 Endinginventory 180,000 overstated 200,000 understated Rentexpense 160,000 understated 100,000 overstated If none of the errors were detected or corrected, by what amount will 2020 net income be overstated or understated? 200,000 overstated 200,000 understated 450,000 understated 450,000 understated Bese 414 Problem 16-9 (AICPA Adapted) Glory Company reported the following errors in the financial statements: 2019 2020 Endinginventory 200,000 under 300,000 over Depreciation 50,000 under ‘An insurance premium of P150,000 was prepaid in 2019 to cover 2019, 2020 and 2021. The entire amount was charged to expense in 2019, ‘On December 31, 2020, fully depreciated machinery was sold for P250,000 cash but the sale was not recorded until 2021. ‘There were no other errors during 2019 and 2020 and no corrections have been made for any of the errors, 1. What is the effect of the errors on 2019 net income? a. 250,000 understated b, 250,000 overstated c. 350,000 understated d. 350,000 overstated 2. What is the effect of the errors on 2020 net income? a. 300,000 understated b. 300,000 overstated ¢. 200,000 understated d. 200,000 overstated |.” What is effect of the errors on retained earnings on December 31, 2020? a. 300,000 overstated b. 250,000 understated c. 50,000 overstated d. 50,000 understated 415° ‘Scanned with @camscannerProblem 16-10 (AICPA Adapted) 2019. The Shannon Company began operations on January financial statements contained the following errors: 2019 2020 Endinginventory 160,000 understated 160,000 overstated Depreciationexpense "60,000 understated Insuranceexpense 100,000 overstated 100,000 understated Prepaidinsurance 100,000 understated On December 31, 2020, fully depreciated machinery was sold for P110,000 cash but the sale was not recorded until 2021. No corrections have been made for any of the errors. ‘Ignoring income tax, what is the total effect of the errors on, 1. Net income for 2019? a. 200,000 over b. 200,000 under 260,000 under a. 0 2. Net income for 2020? a. 300,000 over ‘ . , 300,000 under ¢, 410,000 over d. 410,000 under 8, Retained earnings on December 31, 2020? a. 100,000 over b. 100,000 under 200,000 over 4. 200,000 under 4, Working capital on December 81, 2020? a. 40,000 over b. 40,000 under ©. 60,000 under d. 60,000 under 416 problem 16-11 (IAA) Rebecca Company revealed the following information on ‘December 31, 2020: * The entity failed to accrue sales commissions'at the end * 220,000 140,000 In each cage, the sales commissions were paid and expensed in January of the following year. + Brrors in ending inventories for the last three years were discovered to be as follows: 2018 400,000 understated 2019 540,000 overstated 2020 160,000 understated ‘The unadjusted retained earnings balance on January 1, 2020 is P12,600,000 and the uriadjusted net income for 2020 was 3,000,000. Dividends of P1,750,000 were declared during 2020. 1. What is the adjusted net income for 2020? a. 3,830,000 b. 3,150,000 ©. 8,680,000 d. 3,630,000 2. What is the adjusted balance of retained earnings on December 31, 2020? a. 14,000,000 b. 18,320,000 ©. 13,850,000 4. 11,000,000 4qT ‘Scanned with @camscannerProblem 16-12 (LAA) ‘Holden Company reported the following errors: 219 2029 Over(under)statementofendinginventory (100000) 40,000, Depreciation understatement 40,000 60,000 Failure to acer salaries at year-end 0,000 120,000 As a result of the errors, what was the effect on net income for 20207 a. 240,000 understated b. 240,000 overstated 320,000 understated d. 320,000 overstated Problem 16-13 (IAA) Saturn Company reported the following errors: 2019 2020 50,000 understated 100,000 overstated Ending inventory 150,000 overstated 200,000 overstated Depreciation expense None of the errors were detected or corrected and that no additional errors were made in 2021. 1! What is the net effect of the errors on retained earnings on December 31, 2020? a. 160,000 overstated b. 150,000 understated c. 250,000 overstated d. 250,000 understated 2. By what amount would current assets on December 81, 2021 be overstated or understated? a, 100,000 understated b. 100,000 overstated ©. 50,000 overstated a. 0 478 problem 16-14 (AICPA Adapted) mma Company revealed the following errors in the financial statements: December 31, 2019 inventory understated 500,000 December 1, 2020 inventory overstated £800,000 Depreciation for 2019 overstated 250,000 December 31, 2020 accrued rent income overstated 300,000 ‘December 31, 2020 accrued salaries understated 150,000 ‘The understatement of the 2019 ending inventory pertains to goods in transit purchased FOB shipping point which were rot recorded in 2019 but paid in 2020. On December 3i, 2020, fully depreciated machinery was sold for P100,000 cash but the sale was not recorded until 2021. 1. . What is the effect of the errors on net income for 2019? a. 250,000 understated b. 250,000 overstated c. 500,000 understated a 0 2. What is the effect of the errors on net income for 2020? . “1,150,000 understated b. 1,150,000 overstated . 1,250,000 understated d. 1,250,000-overstated 3. What is the effect of the errors on retained earnings on December 31, 2020? a, 1,160,000 understated b. 1,160,000 overstated ¢. "900,000 understated d. 900,000 overstated 479 ‘Scanned with @camscannerProblem 16-15 (AICPA Adapted) ‘Taal Company revealed the following errors in the financial statements: December 31, 2019 inventory overstated 35,000 ‘December 31, 2020 inventory understated 10,000 Depreciation for 2019 overstated 26,000, ‘Depreciation for 2020 understated 8,000 December 31, 2019 prepaid insurance understated 5,000 ‘December 31, 2020 unearned rent income overstated 4,000 ‘December 31, 2020 accrued salaries understated 20,000 1, What is the effect of the errors on net income for 2019? ‘a, 10,000 understated b, 10,000 overstated ©. 5000 understated d. 5,000 overstated 2, What is'the effect of the errors on net income for 20207 16,000 understated 16,000 overstated 12,000 understated 12,000 overstated peep 3, What is the effect of the errors on retained earnings on ‘December 81, 2020? a. 11,000 understated b. 11,000 overstated ©. 16,000 understated d. 16,000 overstated. 4, What is the effect of the errors on working capital on December 31, 2020? a. 24,000 understated * b. 24,000 overstated ©. 6,000 understated d. 6,000 overstated 480 problem 16-16 (PHILCPA Adapted) Malampaya Company showed income before income tax of 6,500,000 on December 31, 2020. ‘The year-end verification of the transactions revealed the following errors: * 1,000,000 worth of merchandise was purchased in 2020 and included in the ending inventory. However, the purchase was recorded only in 2021. * A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-end. Since the merchandise was still at the port area, it was inadvertently omitted from the inventory on December 31, 2020. * Advertising for December 2020, amounting to P500,000, was recorded when payment was made in January 2021. * Rent of P300,000 on an equipment applicable for six months was received on November 1, 2020. The entire amount was reported as income upon receipt. * Insurance premium covering the period from July 1, 2020 to July 1, 2021 amounting to P200,000 was paid and recorded as expense on July 31; 2020. The entity did not make any adjustment at the end of the year. What is the corrected income before tax for 2020? a. 6,900,000 b. 6,400,000 ®. 6,500,000 4. 6,300,000 481 ‘Scanned with @camscannerProblem 16-17 (AICPA Adapted) During the course of an audit of the financial statements of Julie Company for the year ended December 31, 2020, the following data are discovered: + Inventory oi January 1, 2020 had been overstated by 300,000. + Inventory on December $1, 2020 was ‘understated by -P500,000. + An insurance policy covering three yeyrs had been purchased on January 1, 2019 for P150,000. The entire amount was charged as an expense in 2019. During 2020, the entity received a P100,000 cash advance from a customer for merchandise to be manufactured and shipped during 2021. The amount had been credited to sales revenue. Net income for 2020 per book was P2,000,000. What is the proper net income for 2020? ‘2. 2,650,000 '. 2,350,000 © 1,650,000 4. 2,050,000 Problem 16-18 (LAA) Henson Company had determined the 2019 and 2020 net ‘income to be P4,000,000 and 5,000,000, respectively. In 3 Hest tee anc oe Unncal thatgmsetey sharhlloriog errors are discovered: * Merchandise inventory was incorrectly: determined - 50,000 overstatement for 2019 and P150,000 overstatement for 2020, +" Revenue received in advance in 2019 of P300,000 was credited to a revenue account when received. Of the total, 50,000 was earned in 2019, P200,000 was earned in 2026 and the remainder will be earned in 2021. 400,000 gain on sale of equipment in 2020 was erroneously credited to retained earnings. What is the corrected net income for 2020? a. 5,500,000 b. 5,450,000 5,400,000 d. 6,550, 482 problem 16-19 Multiple choice (IAA) 1. If ending inventory is understated, the effect is to ‘a. Qverstate the net purchases b. Overstate the gross margin ce. Overstate the cost of goods available for sale d. Overstate the cost of goods sold 2. If beginning inventory is overstated, the effect is to a. Overstate net purchases b. Overstate gross margin ¢. Overstate cost of goods available for sale 4. Understate cost of goods, cold 3, The overstatement of ending inventory in the current year will cause a, Retained earnings to be understated in the current year-end statement of financial position b. Cost of goods sold to be understated in the income * statement of next year. ¢. Cost of goods sold to be overstated in the income statement of the current year. d. Statement of financial position not to be misstated in the next year-end. 4. At the middle of the year, an entity paid for insurance Premium for the current year and debited the amount to repaid insurance. At year-end, the bookkeeper forgot to. record the amount expired. In the financial statements prepared at year-end, the omission a. Overstates owners’ equity b. Understates assets c. Understates net income d. Overstates liabilities 5. If at end of current reporting period, an entity erroneously excluded some goods from ending inventory and also erroneously did not record the purchase of these goods, these errors would cause 4 a. The ending inventory to be overstated b. The retained earnings to be understated ©. No effect on net income, working capital and retained earnings 4d. Net income to be understated 483 ‘Scanned with @camscanner6. When the current year's ending inventory is overstated a. ‘The current year's cost of goods cold is overstated, b. The current year’s total assets are understated. ¢. The current year's net income is overstated. 4. The next year’s net income is overstated. 1. An overstatement of ending inventory in the current period would result in income of the next period being a, Overstated b. Understated Correctly stated 4. The answer cannot be determined from the information 8 Which would result ifthe current year’s ending inventory is understated in the cost of goods sold calculation? a. Cost of goods sold would be overstated b. “Total asseta would be overstated cc. Net income would be overstated 4. Retained earnings would be overstated 9, If the beginning inventory in the current year was overstated, the income for the current year would be a. Understated and ascets are correctly stated. b. Understated and assets are overstated. ¢. Overstated and assets are’overstated. d. Understated and assets are understated. 10, Which of the following would cause income to be overstated in the period of occurrence? a. Overestimating bad debt expense ®. Undertatng begining inventory q Overstated purchases 4. Understated ending inventory 484 Problem 16-20 Multiple choice (IAA) 1, Failure to record the expired amount of prepaid rent ‘expense would not a. Understate expense bb, Overstate net income c. Overstate owners’ equity d. Understate liabilities 2, Failure to record accrued salaries at year-end results in a, Overstated retained earings b. Overstated assets c. Overstated liabi d. Understated retained earnings ‘at year-end results in 8, Failure to record depre: a. Understated income b. Understated assets ¢. Overstated expenses d. Overstated assets 4, Which of the following is a counterbalancing error? a. Understated depletion expense b. Bond premium under-amortized c. Prepaid expense adjusted incorrectly d. Overstated depreciation expense 8. Which error will not solf-correct next year? a, Accrued expense not recognized at year-end b. Accrued revenue not recognized at year-end ¢. Depreciation expense overstated for the year d. Prepaid expense not recognized at year-end 485 ‘Scanned with @camscannerCHAPTER 41 ERROR CORRECTION Basic problems Problem 41-1 (AICPA Adapted) ‘Timm Company started operations at the beginning of current year. The entity failed to recognize accruals and prepayments at the end of reporting period. i ‘The income before tax, accrual and prepayments at the end of the current year are: Income before tax x 1,400,000 Prepaid insurance 20,000 ‘Accrued wages 25,000 Rent revenue collected in advance 30,000 Interest receivable 50,000 ‘What amount should be reported as corrected income before tax? a. 1,385,000 b. 1,415,000 1,400,000 1,375,000 Solution 41-1 Answer b Unadjusted income 1,400,000 Prepaid insurance ; 20,000 Accrued wages (25,000) Rent collected in advance 30,000) Interest receivable ‘50,000 Corrected income 1,415,000 Guide to memory Asset understated ~ income understated Asset overstated — income overstated Liability understated ~ income overstated Liability overstated - income understated 582 Problem 41-2 (AICPA Adapted) On December 31, 2019, Astor Company sold merchandise for 750,000 to Day Company. The terms of the sale were net 30, FOB shipping point, ‘The merchandise was shipped on December31, 2019, and arrived atDay on January 5, 2020, ‘Due toa clerical error, the sale was not recorded until January 2020 and the merchandise sold at a25% markup on cost was included in inventory on December 31, 2019, ‘What was the effect of the errors on cost of goods sold for 20197 a. Understated byP750,000 b. Understated by P600,000 ¢. Understated by P150,000 4. Correctly stated Solution 41-2 Answer b ‘The December 31, 2019 inventory was overstated. ‘Therefore, cost of goods sold for 2019 was understated by ‘600,000 (750,000 / 125%) Problem 41-3 (AICPA Adapted) Bren Company's beginning inventory on January 1 was understited | ‘200,000 and the ending inventory was overstated by P600,000. m. ‘What was the effect of the errors on the cost of goods sold forthe ‘current year? a. 400,000 understated b. 400,000 overstated c. 800,000 understated d. 800,000 overstated. Solution 41-3 Answer c January 1 inventory understated 200,000 December 31 inventory overstated 600,000 Cost of goods sold understated 800,000 If beginning inventory is understated, cost of goods sold is also understated fending inventory isovl coto ont sis 583 ‘Scanned with @camscannerProblem 41-4 (AICPA Adapted) ' During 2020, Paul Company discovered that the ending inventories reéported on the financial statements were incorrect by the following. amounts: 2018 60,000 understated 2019 75,000 overstated ‘The entity used the periodic inventory system to ascertain year-end quantities that are converted to peso amounts using FIFO. Prior to any adjustments for these errors, what was the pretax effect ‘onretained earnings on January 12020? a. Comect b. 135,000 overstated ©. 75,000 overstated d. 15,000 overstated Solution 41-4 Answer c 2018 2019 2018 inventory understated 60,000, ¢ 60,000) 2019 inventory overstated (75,000) Net correction to income 60,000 (135,000) Net correction to 2018 net income 60,000 Net correction to 2019 net income (135,000) ‘Net correction to retained earnings (15,000) 584 problem 41-5 (AICPA Adapted) Victoria Company revealed the following: Depreciation 50,000 understated 100,000 overstated Ending inventory 2018 200,000 understated 2019 300,000 overstated Atwhat amount should retained earnings be retroactively adjusted on January 1,20207 a. 250,000 increase b. 250,000 decrease ¢. 400,000 increase d. 400,000 decrease Solution 41-5 Answer b 2018 2019 2018 inventory understated 200,000 (200,000) 2018 depreciation understated ( $0,000) - 2019 inventory overstated (00,000) 2019 depreciation overstated 100,000 Net correction to income 150,000 (400,000) Net correction to 2018 net income 150,000 Net correction to 2019 net income (400,000) Net correction to retained earnings (50,000) 585 ‘Scanned with @camscannerProblem 41-6 (AICPA Adapted) Glory Company reported the following errors in the financial statements: 2018 2019 Ending inventory 200,000under 300,000 over Depreciation 50,000 under ‘An insurance premium of P150,000 was prepaid in 2018 to cover 2018, 2019 and 2020, The entire amount was charged to expense in 2018. On December 31, 2019, fully depreciated machinery was sold for 250,000 cash but the sale was not recorded until 2020, ‘There were no other errors during 2018 and 2019 and no corrections have been madefor any of the errors. Whatis pretax net effect ofthe errors on retained eamings on December 31,2019? a. 300,000 overstated b. 250,000 understated c. 50,000 overstated 4, 50,000 understated Solution 41-6 Answer c 2018 2019 2018 ending inventory under 200,000 (200,000) 2019 ending inventory over (300,000) 2018 depreciation under ( 50,000) = Insurance premium 100,000 (50,000) Unrecorded gain on sale of machinery 250,000 ‘Net correction to income 000 . (300,000) Net correction to 2018 net income 250,000 Net correction to 2019 net income (300,000) ‘Net correction to retained earnings (50,000) ‘The net income of 2018 was understated by P250,000 and the net income of 2019 was overstated by P300,000. Accordingly, the pretax neteffectis overstatement ofretained earings of PS0,000. problem 41-7 (IAA) Crescendo Company reported the following errors: 2018 2019 Ending inventory 150,000 overstated 200,000 understated Rent expense 50,000 understated 100,000 overstated 1. Ifnone of the errors were detected or corrected, by what amount would 2019 net income be overstated or understated? a. 200,000 overstated b. 200,000 understated ©. 450,000 overstated 4. 450,000 understated 2. Whatis the neteffect of the errors onzetained eamings on December 31, 2019? a, 250,000 overstated b. 250,000 understated c. 450,000 understated d. 450,000 overstated Solution 41-7 Question 1 Answer d 20182019 Ending inventory: 2018 overstated (150,000) 150,000 2019 understated 200,000 Rent expense: 2018 understated (50,000) 2019 overstated Net correction to income 200,000) Question 2 Ansswer b Net correction to 2018 net income (200,000) Net correction to 2019 n “450,000 Net correction to retained earnings 250,000 587, ‘Scanned with @camscannerProblem 41-8 (LAA) Satum Company reported the following errors: 2018 2019 Ending inventory 50,000 understated 100,000. overstated Depreciation expense 150,000 overstated 200,000 overstated ‘None of the errors were detected or corrected and that no additional errors were made in 2020. 1. Whatis theneteffect ofthe errors on retained earnings on December 31,20192 a, 150,000 overstated b. 150,000 understated cc. 250,000 overstated d. 250,000 understated 2. By what amount would current assets on December 31,2020 be overstated or understated? a. 100,000 understated ', 100,000 overstated ©. 50,000 overstated 0 a Solution 41-8. Question 1 Answer d 2018 2019 $0,000 ¢ $0,000) (100,000) Depres 150,000 - Depreciation -2019 : 200,000 [Net corection to net income _ 200,000 0,000 Net effect on retained earnings (200,000 + 50,000) 250,000 Question 2 Answer d ‘The current assets on December 31, 2020 are no longer, affecued besatselieoverstatementof2019 endiiginventory woul cost of goods sold. The depreciation eror does not affect current assets 588 Problem 41-9 (AA) 1n 2020, Cremas Company discovered that equipment purchased on January 1,2018 for P1,000,000 was expensed at that time. ‘The equipment should have been depreciated over 5 years with no residual value. The tax rate is 30%, ‘Whats included in the journal entry in 2020 ocorrectthe error? a. Creditequipment 1,000,000 b. Debitretainedeamings 1,000,000 c. Creditretained eamings 420,000 d. Creditretained eamings 600,000 Solution 41-9 Answer c Equipment 1,000,000 ‘Accumulated depreciation (1,000,000/5 x2) 400,000 Income tax payable (600,000 30%) 180,000 Retained earnings (600,000 x 70%) 420,000 Problem 41-10 (AICPA Adapted) On January 1, 2019, Conn Cornpany reported retained earnings of 4,000,000. Be ag In 2019, the entity determined that insurance premiums of 900,000 for the three-year period beginning January 1, 2018 had been paid and fully expensed in 2018. The income tax rate is 30%. What amount should be reported as corrected retained earnings on January 1, 2019? a. 3,400,000 b. 4420,000 ©. 4,600,000 d. 3,580,000 Solution 41-10 Answer b Retained earnings = January 1, 2019 4,000,000 Understatement of prepaid insurance ~ 12/31/2018 (900,000 x 2/3) 600,000 Tax effect (30% x 600,000) (180,000) _ 420,000 Corrected retained earnings - January 1, 2019 4.820,000 589 ‘Scanned with @camscannerCHAPTER 42 ERROR CORRECTION Comprehensive problems Problem 42-1 (AICPA Adapted) ‘During the course of an audit ofthe financial statements of Julie Company for the year ended December 31, 2019, the following data are discovered: + Inventory on January 1, 2019 had been overstated by P300,000. + Inventory on December 31, 2019 was understated by P500,000, + Aninsurance policy covering three years had been purchaséd on January 1,2018 forP150,000. The entire amount was charged as anexpensein 2018. During 2019, the entity received a P100,000 cash advance from 2 ‘customer for merchandise to be shipped during 2020. The amount had been creditedto salesrevenue. The gross profiton sales is 50%. Net income per book was P2,000,000. ‘What amount shouldbe reported as corrected net income for the current year? a. 2,650,000 b. 2,350,000 ©. 1,650,000 d. 2,050,000 Solution 42-1 Answer a Net income per book 2,000,000 January 1 inventory overstated 300,000 December 31 inventory understated 500,000 Unrecorded insurance expense (50,000) ‘Advances from customer (100,000) Corrected net income for current year 590 problem 42-2 (AICPA Adapted) Malampaya Company’ showed income before income tax of 6,500,000 on December31,2019. The year-end verification ofthe ‘ransactions revealed the following enor: + 1,000,000 worth of merchandise was purchased in 2019 and included in the ending inventory, However, the purchase was recorded only in 2020. * A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-end, : Since the merchandise was still at the port area, itwas inadvertently omitted from the inventory balance on December 31,2019. + Advertising for December 2019 amounting to P500,000 was recorded when payment was made in January 2020, * Rental of P300,000 applicable for six months was received on ‘November 1, 2019. The entire amount was reported as income in 2019. * Insurance premium covering the period from July 1,2019 to June 30,2020 amounting to P200,000 was paid and recorded as expense ‘on July 1, 2019. The entity did notmake any adjustmentat the end of the year. ‘What amount should be reported as corrected pretax income for2019? 6,900,000 b. 6,400,000 ©. 6,500,000 4. 6,300,000 Solution 42-2 Answer b Net income per book 6,500,000 Unrecorded purchase of 2019 (1,000,000) Merchandise shipment not included in December 31, 2019 inventory 1,500,000 Unrecorded advertising for December 2019 ( 500,000) Unearned rent income (300,000 x 4/6) ( 200,000) Prepaid insurance (200,000 x 6/12) 100,000 Corrected pretax income $400.00 sot ‘Scanned with GcamscannerProblem 42-3 (LAA) Henson Company had determined the 2018 and 2019 net income to be P4,000,000and P5,000,000, respectively, Ina frst time audit of the financial statements, the following errors rediscovered: * Merchandise inventory was incorrectly determined - P50,000 overstatement for 2018 and P150,000 overstatement for 2019. ‘t Revenue received in advance in 2018 of P300,000 was credited toa revenue account when received. Ofthe total, P50,000 was eared in 2018, P200,000 was earned. in2019 and the remainder will be earned in 2020. * P400,000 gain on sale of equipment in 2019 was erroneously credited to retained earings. ‘What amount should be reported as corrected net income for 2019? a. 5,500,000 b. 5,450,000 ‘ ec. 5,400,000 4. 5,550,000 b Solution 42-3 Answer a 2018, 2019 Net income per book 4,000,000 5,000,000 (Overstatement of inventory 2018 (50,000) 50,000 2019 (150,000) Revenue received in advance (250,000) , 200,000 Gain onsale of equipment 400,000 Corrected net income 3,700,000 5,500,000 592 problem 42-4 (IAA) ‘Bexley Company isin the process of adjusting the books a the end of 2019. The accounting records revealed the following information: + The entity failed to accrue sales commissions at the end of 2017 and 2018. 2017 220,000 2018 140,000 Ineach case, the sales commissions were paid and expensed in January ofthe following yer. + Brorsinending inventory forthelasthree years: 2017 400,000 understated m8 540000 overstated 2019 150,000 understated ‘The unadjusted retained earings balance on January 1, 2019 is 12,600,000 and the unadjusted net income for 2019 was 3,000,000. Dividends of P1,750,000 were declared during 2019. 1. Whatamount should be reported asadjusted netincomefor20192 a. 3,830,000 b. 3,150,000 ©. 3,680,000 d, 3,530,000 2. What amount should be reported asadjusted retained earings on December 31,2019? a. 14,000,000 b. 13,320,000 c. 13,850,000 4. 11,000,000 , 593 Scanned with @camscannerSolution 42-4 Question 1 Answer a 2017 Unrecorded commissions: 2017 (220,000) 2018 Ending inventory: 2017 understated 2018 overstated 2019 understated 400,000 Net correction to income [Net income per book for 2019 ‘Net correction to income of 2019 Adjusted net income of 2019 Question 2 Answer a Net correction to income of 2017 ‘Net correction to income of 2018 [Net correction to income of prior years Retained earings — January 1, 2019 , Prior period errors - 2017 and 2018 ‘Corrected beginning balance ‘Net income for 2019 Dividends declared in 2019 Retained earnings ~ December 31, 2019 594 2018 220,000 (140,000) (400,000) (540,000) (860,000) 2019 140,000 540,000 150,000 830,000 3,000,000 830,000 830,000 180,000 (860,000) (680,000) 12,600,000 (680,000) 11,920,000 3,830,000 (4,750,000) 14,000,000 Problem 42-5 (AICPA Adapted) ‘Shannon Company began operations on January 1,2018. Financial statements for the years ended December 31, 2018 and 2019 contained the following errors: 2018 2019 Endir ginventory 160,000 understated "150,000 overstated Depreciation expense 60,000 understated Insurance expense 100,000 overstated Prepaid insurance 100,000 understated Inaddition, on December 31, 2019, filly depreciated machinery was sold for P110,000 cash but the sale was not recorded until 2020. No corrections have been made for any of the errors. Ignore income tax. 100,000 understated 1. What is the net effect of the errors on 2019 net income? a. 300,000 understated b. 300,000 overstated ¢. 410,000 understated d. 410,000 overstated 2. What is the net effect of the errors on retained earnings on December 31,2019? a. 200,000 understated b. 200,000 overstated ©. 100,000 understated d. 100,000 overstated 3. What is the net effect of the errors on working capital on December 31, 2019? a, 40,000 overstated b. 40,000 understated ©. 60,000 understated 4. 60,000 overstated 595 ‘Scanned with @camscannerSolution 42-5 Question 1 Answer’ Question 2 Answer d Question 3 Answer a 2018 = 2019 «12/31/2019 2018 inventory understated 160,000 (160,000) 2019 inventory overstated (150,000) (150,000) 2018 depreciation understated (60,000) Prepaid insurance understated 100,000. (100,000) Gain on sale of machinery 110,000 110,000 ‘Net correction (40,000) Net income 2018 understated 200,000 ‘Net income 2019 overstated (300,000) Retained earnings ~ December 31, 2019 overstated (100,000) ‘The understatement of 2018 ending inventory does not affect the working capital on December 31, 2019 because thie 2018 ending inventory would become the beginning inventory of 2019. ‘The understatement of prepaid insurance on December 31, 2018 does not affect working capital on December 31,2019 because the 2018 prepaid insurance would expire as expense of 2019. Depreciation does not affect current assets and therefore there is no effect on working capital. Cash was understated to the extent of the gain on sale of machinery and therefore working capital was understated. 596 problem 42-6.(LAA) pBlonde Company provided the following comparative statements of income and retained earings: 2019 2018 sales ; 4,500,000 4,350,000 Cost of goods sold 2,000,000 2,300,000 Gross income 2,500,000 2,050,000 Expenses 1,600,000 1,500,000 Net income 900,000 _ $50,000 1,450,000 1,200,000 Beginning retained earnings Net income Dividends 900,000 550,000 (200,000) (_ 300,000) 2,150,000 1,450,000 Ending retained earnings 1n2020, Blonde Company discovered that ending inventory for 2018 was understated by P100,000 and the ending inventory for 2019 was overstated by P400,000. ‘What amount should be reported as corrected retained camings on December 31, 2019? a. 2,550,000 b. 1,750,000 cc. 2,650,000 d._ 1,650,000 Solution 42-6 Answer b Retained earnings ~ December 31, 2019 2,150,000 Overstatement of 2019 ending inventory (400,000) Corrected balance — December 31, 2019 1,750,000 ‘The inventory error in 2018 is counterbalanced in 2019 and therefore ‘has no effect on retained earnings on December 31, 2019. 397 ‘Scanned with @camscanner