CORRECTION OF ERRORS

PROBLEM 1

Centineo Corporation’s current asset and liabilities on the balance sheet as of December 31, 2018
appear as follows:

Current Assets
Cash P 1,500,000
Accounts Receivable P 2,370,000
Allowance for Doubtful Accounts (270,000) 2,100,000
Inventories 6,570,000
Prepaid Expenses 340,000
Total Current Assets P 10,510,000

Current Liabilities
Accounts Payable P 1,890,000
Notes Payable 2,000,000
Total Current Liabilities P 3,890,000

The following errors in the corporation’s accounting have been discovered:

1. January 2019 cash disbursements entered as of December 2017 included payment of

accounts payable in the amount of P1,470,000 on which a cash discount of 2% was taken.

2. The inventory included P540,000 of merchandise that have been received at December 31 but
for which no purchase invoices have been received or entered. Of this amount P260,000 had
been received on consignment; the remainder was purchased F.O.B destination, terms 2/10, n/30.

3. Sales for the first four days in January 2019 in the amount of P1,000,000 were entered in the
sales book as of December 31, 2018. Of these, P625,000 were sales on account and the
remainder were cash sales.

4. Cash not including cash sales, collected in January 2019 and entered as of December 31,2018,
totaled P1,270,380, Of this amount, P699,720 was received on account after cash discounts of
2% had been deducted; the remainder represented the proceeds of a bank loan.

Questions:

Based on the above and the result of your audit, determine the following:

1. Adjusted cash balance as of December 31, 2018

a. 2,046,220
b. 2,045,220
c. 2,295,220
d. 2,074,620
2. Adjusted cash accounts receivable balance as of December 31, 2018
a. 2,550,000
b. 2,550,720
c. 2,434,720
d. 2,449,000

3. Adjusted accounts payable as of December 31, 2018

a. 3,625,000
b. 3,715,000
c. 3,650,000
d. 3,640,000

4. Adjusted working capital as of December 31, 2018

a. 5,048,720
b. 5,804,880
c. 5,042,440
d. 5,000,000

5. Net adjustments in the reported profit for the year ended December 31, 2018 as a result of this
errors
a. 1,555,120
b. 2,000,000
c. 2,022,000
d. 1,724,120

Solutions:
1. Unadjusted cash balance P 1,500,000
January cash payments (1,470,000 x .98) 1,440,600
January cash sales (1,000,000 – 625,000) 375,000
January cash collections and loan proceeds (1,270,380)
Adjusted cash balance P 2,045,220

2. Unadjusted accounts receivable P 2,370,000

January sales on account (635,000)
January collections on AR (699,720 / .98) 714,000
Adjusted accounts receivable P 2,449,000

3. Unadjusted accounts payable P 1,890,000

January payments on accounts payable 1,470,000
Unrecorded purchases (540,000-260,000) 280,000
Adjusted accounts payable P 3,640,000
4. Current assets:
Cash (see no. 1) P 2,045,220
Accounts receivable (see no. 2) 2,449,000
Allowance for doubtful accounts (270,000)
Inventories (6,570,000 – 260,000) 6,310,000
Prepaid expenses 340,000 P 10,874,220
Less current liabilities:
Accounts payable (see no. 3) 3,640,000
Notes payable [ 2,000,000 - (1,270,000 - 699,720)] 1,429,340 5,069,340
Working capital P 5,804,880

over (under)
5. January purchase discounts ( 1,470,000 x .02) P 29,400
Goods held on consignment 260,000
Unrecorded purchases ( 540,000 – 260,000) 280,000
January sales 1,000,000
January sales discounts [( 699,720 / .98) x .02] (14,280)
Net misstatement P 1,555,120
PROBLEM 2

You were engaged by LARA JEAN COMPANY to audit its financial statements. In examining
the books, you found out that certain adjustments had been overlooked at the end of 2017 and
2018. You also discovered that other items had been improperly recorded. These omissions and
other failures for each year are summarized below:

12/31/18 12/31/17
Salaries payable P820,000 P725,570
Interest receivable 214,000 235,440
Prepaid insurance 305,000 364,000
Advances from customers (Collections from 561,000 470,360
customers had been recorded as sales but
should have been recognized as advances
from customers because goods were not
shipped until the following year)
Machinery (Capital expenditures had been 511,000 575,000
recorded as repairs but should have been
charged to Machinery; the depreciation
rate is 10% per year, but depreciation in the
year of expenditure is to be recognized at 5%)

Questions:

Based on the above and the result of the year audit, answer the following:

1. What is the net effect of the errors on the 2017 audit? Understated by 50,240
2. What is the net effect of the errors on the 2018 profit? Overstated by 162,440
3. What is the net effect of the errors on the company’s working capital at December 31, 2018?
Understated by 862,000
4. What is the net effect of the errors on the balance of the company’s retained earnings at
December 31, 2018? Overstated by 112,200
5. What would be the net effect of errors on profit of 2017 if the depreciation for the year
expenditure is also 10%? Overstated by 36,010
Solutions

Questions no. 1-4

Profit Profit WC RE
2017 2018 12/31/17 12/31/18
Salaries payable
2017 725,570 (725,570)
2018 820,000 820,000 820,000
Interest receivable
2017 (235,440) 235,440
2018 (214,000) (214,000) (214,000)
Prepaid insurance
2017 (364,000) 364,000
2018 (305,000) (305,000) (305,000)
Advances from customers
2017 470,360 (470,360)
2018 561,000 561,000 561,000
Machinery
2017 (575,000) (575,000)
28,750 57,500 86,250
2018 (511,000) (511,000)
25,550 25,550
over (under) 50,240 (162,440) 862,000 (112,200)

5. Profit over (under)

2017

Salaries payable 725,570

Interest receivable (235,440)
Prepaid insurance (364,000)
Advances from customers 470,360
Machinery (575,000)
Depreciation (57,500)
Total (36,010)
PROBLEM 3

SHARE MO LANG COMPANY contained the following errors on its year end financial
statement as of December 31, 2018:

December 31,2017 December 31,2018

Ending Inventory P 200,000 understated P 80,000 overstated

Depreciation Expense 20,000 understated

An insurance premium of P65,000 was prepaid in 2017 covering the years 2017, 2018, and 2019.
The same was charged to expense in full in 2017. In addition, on December 31, 2018, a fully
depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2019.
There were no other errors during 2017, 2018, 2019 and no considerations have been made for
any of the errors. Ignore income tax considerations.

Questions

1. What is the net effect of the errors on the 2017 profit?

2. What is the net effect of the errors on the 2018 profit?
3. What is the net effect of the errors on the company’s working capital at December 31, 2018?
4. What is the net effect of the errors on the balance of the company’s retained earnings at
December 31, 2018?
5. What is the net effect of the errors on the company’s working capital at December 31, 2019?

Solutions:

Question 1-5

12/31/19 inventory unde