PROBLEMS

STRAIGHT PROBLEM SUGGESTED SOLUTION GUIDE:

Stronger Corporation asked you to review its records and 2006 2007 2008 2009 12.31.09
prepare corrected financial statements. The books of Profit Profit Profit Profit R.E
accounts are in agreement with the following balance Unadjusted
sheet: Ending
inventory-
Stronger Corporation
over:
Balance Sheet
2007
December 31, 2009 2008
Assets Ending
Cash P 40,000 inventory-
Accounts receivable 80,000 under:
Notes receivable 24,000 2006
Inventories 200,000 2009
Total assets P344,000 Prepaid
expense:
Liabilities and Owners’ Equity 2006
Accounts payable P 16,000 2007
Notes payable 32,000 2008
Capital stock 80,000 2009
Retained earnings 216,000 Unearned
Total liabilities and owners’ equity P344,000 income:
2007
2009
A review of the company’s books indicates that the
Accrued
following errors and omissions had not been corrected
expense:
during the applicable years: 2006
2007
2006 2007 2008 2009 2008
Ending 2009
inventory - Accrued
overstated P - P56,000 P64,000 P - income:
Ending 2007
inventory- 2009
understated 48,000 - - 72,000 Adjusted
Prepaid expense 7,200 5,600 4,000 4,800
Unearned
income - 3,200 - 2,400
MULTIPLE CHOICE PROBLEMS
Accrued
expense 1,600 600 800 400
Accrued income Use the following information for questions 1 to 5.
- 1,000 - 1,200
BETTER Corporation started its operations on July 10,
No dividends were declared during the years 2006 to 2009 2008, by issuing ordinary shares amounting to P75,000.
and no adjustments were made to retained earnings. The Net income for the remainder of 2008 was P30,000 and for
company’s books reported the following profit: 2009 it was P56,250. BETTER Corporation has not issued
additional shares and has not declared dividends since July
2006 P60,000 2008 P52,000 1, 2008. A comparative balance sheet prepared by the
2007 44,000 2009 60,000 accountant of the company is shown below:

REQUIRED: BETTER Corporation

1. Prepare the necessary adjusting journal entries as of Balance sheets
December 31, 2009. (Disregard tax implications) December 31, 2009 and 2008
Assets
2. Determine the adjusted profit or loss for 2006, 2007,
2009 2008
2008, and 2009.
Cash P 22,650 P 16,650
3. Determine the adjusted Retained earnings as of Accounts receivable 67,500 48,750
December 31, 2009.
Merchandise inventory 60,000 42,600
Equipment 45,000 45,000
Total assets P195,150 P153,000
Liabilities and Equity
2009 2008
Accounts payable P 33,900 P 33,000
Notes payable to bank - 15,000
Share capital (P1 par value) 75,000 75,000
Retained earnings 86,250 30,000
Total Liabilities and Equity P195,150 P153,000

The following errors were discovered by the auditor who

was engaged in January 2010 to examine the financial
statements of the Corporation:

Page 1 of 3 www.prtc.com.ph P1.502A

EXCEL PROFESSIONAL SERVICES, INC.

6. Cebu Company reported a retained earnings balance of

a. Inventory was overstated by P4,500 at the end of P5,000,000 at January 1, 2009. In August 2009, Cebu
2009. determined that insurance premiums of P600,000 for
the three-year period beginning January 1, 2008, had
b. Accrued liabilities of P1,800 were not recorded at the been paid and fully expensed in 2008. Cebu has a
end of 2009. 35% income tax rate. What amount should Cebu
report as adjusted beginning retained earnings in
c. Inventory of supplies of P1,050 was not recorded as an 2009?
asset at the end of 2008, and inventory of supplies of a. P5,260,000 c. P4,740,000
P450 at the end of 2009 was debited to an expense. b. P5,390,000 d. P5,130,000

d. Accrued revenue of P1,200 at the end of 2008 was not 7. After the issuance of its 2008 financial statements,
recorded as receivable. Terry, inc. discovered a computational error of
P150,000 in the calculation of its December 31, 2008
e. An allowance for doubtful accounts equal to 6% of inventory. The error resulted in a P150,000
accounts receivable should be established at the end of overstatement in the cost of goods sold for the year
each year. No accounts receivable were written off ended December 31, 2008. In October 2009, Terry
during the two years. paid the amount of P500,000 in settlement of litigation
instituted against it during 2008. Ignore income taxes.
f. Depreciation of P1,500 was not recorded in 2008 and In the 2009 financial statements, the December 31,
depreciation of P3,000 was not recorded in 2009. 2008 retained earnings balance, as previously
reported, should be adjusted by a
g. The merchandise inventories at the end of 2008 and a. P150,000 credit c. P500,000 debit
2009 did not include merchandise that was then in b. P350,000 debit d. P650,000 credit
transit and to which the company had title. These AICPA 11/84 (Kimwell)
shipments of P5,250 and P3,250 were recorded as
purchases in January 2009 and 2010, respectively. 8. On January 1, 2009, Star Company agreed to pay its
former president P500,000 under a deferred
QUESTIONS: compensation arrangement. Star should have
recorded this expense in 2008 but did not do so.
Answer the following: Star’s reported income tax expense would have been
P150,000 lower in 2008 had it properly accrued this
1. Net adjustment on 2008 net income is deferred compensation. In its December 31, 2009
a. (P9,675) c. (P2,175) financial statements, Star should adjust the beginning
b. (P4,425) d. (P3,075) balance of its retained earnings by
a. P500,000 credit c. P500,000 debit
2. Corrected 2009 net income is b. P350,000 credit d. P350,000 debit
a. P59,052 c. P44,025
b. P44,052 d. P59,025 9. Mactan Company’s statements for 2007 and 2008
included the following errors:
3. Correcting journal entry in early 2010, assuming that
December 31, 2007 inventory
the 2009 accounts are closed, will include a
understated P2,000,000
a. Debit to Retained earnings at P14,400
December 31, 2008 inventory
b. Debit to Retained earnings at P6,900
overstated 1,000,000
c. Credit to Allowance for doubtful accounts at P2,925
Depreciation for 2007 understated 400,000
d. Debit to accumulated depreciation at P4,500
Depreciation for 2008 overstated 800,000
4. Adjusted total assets on December 31, 2008 is How much should retained earnings be retroactively
a. P145,125 c. P150,825 adjusted on January 1, 2009?
b. P156,075 d. P156,057 a. P 600,000 increase
b. P 600,000 decrease
5. Adjusted total liabilities and equity on December 31, c. P1,400,000 decrease
2009 is d. P1,400,000 decrease
a. P185,800 c. P188,250
b. P182,550 d. P191,050 10. Marco, Inc. is a calendar-year corporation. Its
financial statements for the years 2008 and 2009
contained errors as follows:
2008 2009
Ending Inventory P 6,000 P10,000
understated overstated
Depreciation 11,000 7,000
Expense overstated overstated
Assuming that the errors made in 2008 were
corrected, but that the errors made in 2009 were not
detected, by what amount will 2009 income before
taxes be overstated or understated?
a. P 3,000 overstated
b. P17,000 understated
c. P10,000 overstated
d. P8,000 understated

- now do the DIY drill -

Page 2 of 3
EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. Koppell Co. made the following errors in counting its 5. During the course of your examination of the financial
year-end physical inventories: statements of H Co., a new client, for the year ended
2007 ..........................P 60,000 overstatement December 31, 2009, you discover the following:
2008 .......................... 108,000 understatement  Inventory at January 1, 2009, had been overstated
2009 .......................... 90,000 overstatement by P3,000.
 Inventory at December 31, 2009, was understated
As a result of the above undetected errors, 2009 by P5,000.
income was  An insurance policy covering three years had been
a. understated by P18,000. purchased on January 2, 2008, for P1,500. The
b. overstated by P18,000. entire amount was charged as an expense in 2008.
c. overstated by P198,000.
d. understated by P198,000. During 2009 the company received a P1,000 cash
advance from a customer for merchandise to be
2. Biden Corp. reports on a calendar-year basis. Its 2008 manufactured and shipped during 2010. The P1,000
and 2009 financial statements contained the following had been credited to sales revenues. The company's
errors: gross profit on sales is 50%.
2008 2009 Net income reported on the 2009 income statement
Over(under)statement (before reflecting any adjustments for the above
of ending inventory P(10,000) P 4,000 items) is P20,000.
Depreciation
The proper net income for 2009 is
understatement 4,000 6,000
a. P26,500 c. P23,500
Failure to accrue
b. P16,500 d. P20,500
salaries at year end 8,000 12,000
P19 App. B pp. 1320 Wiley08-09
As a result of the above errors, 2009 income would be
a. overstated by P4,000.
b. overstated by P22,000. Use the following information for the next three questions.
c. overstated by P24,000.
Mandaue Company began operations on January 1, 2008.
d. overstated by P16,000.
Financial statements for the years 2008 and 2009
S, S & S
contained the following errors:
3. Griggs Company bought 30% of Jackson Corporation in 2008 2009
2009. During 2009, Jackson reported net income in Ending inventory 700,000 under 500,000 over
the amount of P400,000 and declared and paid Depreciation 150,000 under
dividends in the amount of P50,000. Griggs Insurance expense 50,000 over 50,000 under
mistakenly accounted for the investment using the cost Prepaid insurance 50,000 under
method instead of the equity method. What effect
In addition, on December 31, 2009, a fully depreciated
would this error have on the investment account and
equipment was sold for P100,000 cash but the sale was
net income, respectively, for 2009?
not recorded until 2010. Ignoring income tax, what is the
a. Understated by P120,000; overstated by P105,000.
total effect of the errors on
b. Overstated by P105,000; understated by P105,000.
c. Understated by P105,000; understated by P105,000.
6. Net income for 2008?
d. Overstated by P120,000; overstated by P120,000.
a. P600,000 under c. P600,000 over
b. P550,000 under d. P550,000 over
4. Kentucky Enterprises purchased a machine on January
2, 2008, at a cost of P120,000. An additional P50,000
7. Net income for 2009?
was spent for installation, but this amount was
a. P1,150,000 under c. P1,150,000 over
charged erroneously to repairs expense. The machine
b. P1,250,000 under d. P1,250,000 over
has a useful life of five years and a residual amount of
P20,000. As a result of the error,
8. Working capital on December 31, 2009?
a. retained earnings at December 31, 2009, was
a. P400,000 under c. P400,000 over
understated by P30,000 and 2009 income was
b. P500,000 under d. P500,000 over
overstated by P6,000.
b. retained earnings at December 31, 2009, was
understated by P38,000 and 2009 income was
overstated by P6,000.
c. retained earnings at December 31, 2009, was
understated by P30,000 and 2009 income was
overstated by P10,000.
d. 2008 income was understated by P50,000.

Page 3 of 3