Acctg 5: ERROR CORRECTION
Problem 1:
T Company began operations on January 1, 2019. The accounting records have been maintained on a double-entry basis but the
auditor noted that the cash basis accounting has been used by the company.
The trial balance prepared from those records on December 31, 2020 is as follows:
Cash
750,000
Sales
2,000,000
Purchases
1,000,000
Operating expenses
750,000
Printing equipment
100,000
Ordinary shares
1,000,000
Land
400,000
Building
750,000
Mortgage payable
450,000
Retained earnings
300,000
TOTAL
3,750,000
3,750,000
During the course of the audit, the following data were gathered:
 Accounts receivable at December 31, 2019, and December 31, 2020 were 100,000 and 250,000, respectively.
Sales
100,000
RE
100,000
Accounts receivable
250,000
Sales
250,000
 Accounts payable at December 31, 2019 and December 31, 2020 were 175,000 and 140,000, respectively.
Retained earnings 175,000
Purchases
175,000
Purchases
140,000
Accounts payable 140,000
 Included in sales of 2020 was 20,000 paid in advance by a customer for goods to be delivered in 2021.
Sales
20,000
Advances from customers 20,000
 Accrued expenses total 35,000 at year-end 2019 and 50,000 at year-end 2020.
R.E. 35,000
Operating Expenses 35,000
Operating Expenses 50,000
Accrued expenses

50,000
Merchandise inventory amounted to 75,000 at December 31, 2019 and 110,000 at December 31, 2020. The purchases
include 50,000 cash advances to a supplier for merchandise to be delivered in 2021.
COGS
75,000
R.E.
75,000
Inventory
COGS
110,000
110,000
Advances to supplier
50,000
Purchases
50,000
 The printing equipment was acquired on September 1, 2019. The estimated life is 10 years with no residual
value. Land and building were reacquired on September 1, 2019, and the building has an estimated useful life
of 20 years.
Depreciation- equipment
ACDEP- equipment
R.E. (Sept 209: 10K x 4/12)
ACDEP- equipment
10,000
10,000
3,333
3,333
*Equipment (100,000/10 years) = 10K Depreciation
* RE debited because understated expense in 2019=overstated income

Land and building were reacquired on September 1, 2019, and the building has an estimated useful life of 20 years.
Depreciation-building
ACDEP- BLDG
37,500
37,500
R.E.
(37,500 x 4/12) 12,500
ACDEP- BLDG
12,500
* Building: (750K/20 years) =37,500
* RE debited because understated expense in 2019= Overstated income

An analysis of the company’s receivable indicates that at December 31, 2020, 10% outstanding accounts may prove
uncollectible.
Doubtful accounts
25,000
Allowance for doubtful accounts
25,000
*Dec 31, 2020: 250K x 10%= 25K
* To record allowance for doubtful accounts.*

Mortgage payable was related to the land and the building acquired on September 1, 2019. Interest is at 12% per
annum, payable semi-annually on September 1 and March 1. The mortgage payable is payable in annual
installments of 50,000 every August 31. The first installment was paid on August 31, 2020. The interest paid was
charged to operating expenses.
Sept-Dec 31, 2020:
Interest expense (500Kx12%x8/12)
Retained earnings (500Kx12%x4/12)
OPEX (500Kx12%)
40,000
20,000
60,000
Interest expense (450Kx12%x4/12) 18,000
Accrued interest payable
18,000
Prepare the following:
a. Adjusting entries on December 31, 2020.
b. Statement of comprehensive income for the year 2020.
c.
Statement of financial position at December 31, 2020.
Cash
Sales
Purchases
Operating expenses
Printing equipment
Ordinary shares
Land
Building
Mortgage payable
Retained earnings
TOTAL
750,000
2,000,000
1,000,000
750,000
100,000
1,000,000
400,000
750,000
450,000
300,000
3,750,000
INCOME STATEMENT:
COMPUTATION OF SALES
Sales per book
Accounts receivable – 2020
Accounts receivable – 2019
100,000
Advances from customer – 2020 20,000
Sales
*Advances to be delivered on 2021.
COMPUTATION OF PURCHASES
Purchases per book
3,750,000
2,000,000
250,000
(120,000)
2,130,000
1,000,000
Accounts payable – 2020
Accounts payable – 2019
Advances to supplier
Purchases
175,000
50,000
140,000
(225,000)
915,000
*cash advances to a supplier for merchandise to be delivered in 2021.
COMPUTATION OF OPEX
OPEX per book
Accrued expenses 2019 (already incurred in 2019, just paid in 2020)
Accrued expenses 2020
Charged to opex instead of interest
OPEX
750,000
(35,000)
50,000
(60,000)
705,000
INCOME STATEMENT:
Net sales
2,130,000
Cost of goods sold:
Merchandise inventory, begin
75,000
Purchases
915,000
Less: Merchandise Inventory, end (110,000) (880,000)
Gross income
1,250,000
Operating Expenses:
705,000
Doubtful accounts
25,000
Depreciation-equipment
10,000
Depreciation-building
37,500
Interest expense
58,000
(835,500)
Net income
414,500
Balance sheet:
T Company
Statement of Financial Position
December 31,2020
ASSETS
Current:
Cash
Accounts Receivable,2020
Allowance for doubtful accounts
Inventory, 2020
Advances to supplier(prepayment)
Noncurrent:
Printing equipment
ACDEP – equipment
Land
Building
ACDEP – building
Total assets
750.000
250,000
(25,000)
110,000
50,000
100,000
(13,333)
400,000
750,000
(50,000)
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable,2020
Advances from customer(unearned)
Accrued expenses,2020(incurred but not yet paid)
Accrued Interest payable
Total current liability
Noncurrent:
Mortgage payable
Total liabilities
Equity:
1,135,000
1,186,667
2,321,667
140,000
20,000
50,000
18,000
228,000
450,000
678,000
Ordinary shares/Share capital
Retained earnings
(229,167 + NI: 414,500)
Total liabilities & equity
1,000,000
643,667
1,643,667
2,321,667
COMPUTATION OF RETAINED EARNINGS
RE per book
300,000
AR 2019,CR
100,000
AP 2019,DR
(175,000)
Inventory 2019,CR
75,000
Accrued expenses 2019,DR (35,000)
2019 Depreciation
(15,833) ---Equipment:3,333+Bldg:12,500
Insurance
(20,000)
Corrected RE 2020
229,167
Problem 2:
S Company 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.
S has prepared the following comparative financial statements for the years ended December 31, 2020 and December 31, 2019:
2020
Cash
Held for trading securities, at cost
2019
183,000
78,000
355,000
2,000
78,000
278,000
207,000
45,400
202,000
63,100
Total assets
868,400
623,100
Accounts payable
Shareholder’s equity
121,400
747,000
196,100
427,000
Total
868,400
623,100
Account receivable, net of 37,000
allowance in 2020 and 18,000 in
2019
Merchandise inventory
Plant assets, net of Acc. Dep.
121,600 in 2020 and 106,400 in
2019
Balances, 1/1/19
Profits, 2019
Dividends
Balances, 12/31/19
Issuances of 8,000
shares at 10 par for
12.50 per share
Profit for 2020
Balances, 12/31/20
Ordinary
shares
180,000
Share
premium
----
180,000
80,000
---20,000
260,000
20,000
2020
Sales
Cost of sales
Gross profit
Operating expenses
Net income
1,000,000
430,000
570,000
350,000
220,000
Retained
earnings
68,000
195,000
16,000
247,000
220,000
467,000
2019
900,000
395,000
505,000
310,000
195,000
During the course of the audit, the following additional facts were determined:
1. An analysis of collections and losses on accounts receivable during the past 2 years indicates a drop in anticipated losses
due to bad debts. After consultation with management, it was agreed that the loss experience rate on sales should be
reduced from the recorded 2% to 1 ½%, beginning with the year ended December 31, 2020.
Allowance for doubtful accounts
4,000
Doubtful accounts expense
4,000
*Doubtful accounts expense (37K-18K) 19,000
*1M x 1.5%= `
15,000
4,000
2. An analysis of equity securities held for trading revealed market value as follows:
December 31, 2019
75,000
December 31, 2020
85,000
2019:
Unrealized loss on trading securities 3,000
Held for trading securities
3,000
2020:
Held for trading securities
7,000
Retained earnings
3,000
Unrealized gain on trading sec.
10,000
(Trading securities: FV: 85,000 - CA: 75,000)
3. The merchandise inventory as of December 31, 2019 was overstated by 8,900 and the merchandise inventory at December
31, 2020 was overstated by 13,600.
Retained earnings
8,900
Inventory
8,900
To correct the overstatement of net income due to the overstatement of 2019 ending inventory.
Inventory
8,900
COGS
8,900
To correct the overstatement of COGS due to overstatement of 2020 beginning inventory.
OR:
Retained Earnings
8,900
COGS
COGS
8,900
13,600
Inventory 13,600
4. On January 2, 2019, equipment costing 36,000 (useful life of 10 years and residual value of 6,000) was incorrectly charged
to selling expense. S uses the straight-line depreciation method.
In 2020, fully depreciated equipment (with no residual value) that originally cost 20,000 was sold as scrap for 3,000. The
company credited the proceeds of 3,000 to the equipment account.
Entry made:
Selling expenses 36,000
Cash
36,000
Correcting entries:
Equipment
36,000
Retained earnings 36,000
* Overstated expense=understated income-- CR. RE
2019:
Retained earnings 3,000
ACDEP-Equipment
3,000
(36,000-6,000/10 years)
* To record unrecognized depreciation on 2019: understated expense=overstated income)
2020:
Depreciation Expense
3,000
ACDEP-Equipment
3,000
COMPOUND ENTRY:
Equipment
36,000
Depreciation expense
3,000
ACDEP-Equipment
6,000
Retained earnings
33,000
For fully depreciated equipment:
Entry made:
Cash
3,000
Equipment
3,000
ACDEP-Equipment
20,000
Equipment
17,000
Other income
3,000
5. An analysis of 2018 operating expenses revealed that S charged to expense a 4-year insurance premium of 12,000 on
January 2, 2018. No adjusting entries were made at the end of 2018, 2019 and 2020.
Entry made:
Operating expense
Cash
12,000
12,000
Correcting entries:
Prepaid insurance
12,000
Retained earnings
12,000
*To adjust for nonrecognition of prepaid insurance on 2020.
Retained earnings
6,000
Insurance Expense
3,000
Prepaid insurance
9,000
COMPOUND ENTRY:
Prepaid insurance (12K/4yrs)
Insurance expense
3,000
3,000
Retained earnings
6,000
*To adjust for nonrecognition of prepaid insurance on 2021.
*To record the insurance expense for 2020.
Requirements:
a. Corrected statement of comprehensive income for the years ended December 31, 2020 and 2019.
Corrected statement of financial position as of December 31, 2020 and 2019.
b. Correcting entries
Reported Net income
1 Decrease in doubtful accounts
expense
2
Unrealized
loss
on
2019,
2020
2019
220,000
4,000
195,000
-
10,000
(3,000)
unrealized gain on 2020:
3 Ending merchandise overstated in
2019:
8,900
3 Ending merchandise overstated in
2020:
(13,600)
4 Equipment purchased misposted in
selling expense in 2019.
Decrease in selling expense of 2019.
2019: overstated expense
2019 & 2020: recognize depreciation
expense.
(3,000)
4 Misposting of proceeds
equipment sold:
2020: understated income
of
5 Recognition of insurance expense
for 2020
2020: understated expense
2019: Recognition of overstated
expense
Corrected Net income
(8,900)
2020
36,000
(3,000)
33,000
3,000
(3,000)
6,000
226,300
222,100
Cash
Held
for
trading
securities, at FV
Account receivable, net of
32,000 allowance in 2020
and 18,000 in 2019
AR, 2020 (net of 37,000
355,000
+ Allowance deducted
4,000
Adjusted
AR,
2020
359,000
Merchandise
inventory
202,000
Overstatement
of
(8,900)
Adjusted 2019 Inventory:
2019
183,000
85,000
2,000
75,000
359,000
278,000
193,400
193,100
3,000
78,400
6,000
96,100
901,800
650,200
121,400
780,400
901,800
196,100
454,100
650,200
193,100
Merchandise
inventory
207,000
Overstatement
of
(13,600)
Adjusted 2020 Inventory:
193,400
Prepaid insurance
Plant assets, net of acc.
Dep. 104,600 in 2020 and
109,400 in 2019
2019:
63,100
+ Equipment purchased
33,000
Adjusted
96,100
2020:
45,400
+ Equipment purchased
33,000
Adjusted
78,400
Total Assets
Accounts payable
Shareholder’s equity
Total
Liabilities
Equity
COMPUTATION OF SHE:
Ordinary
shares
Balances, 1/1/19
Profits, 2019
Dividends
180,000
Share
premium
----
Retained
earnings
68,000
222,100
(16,000)
TOTAL
SHE
248,000
&
Balances, 12/31/19
Issuances of 8,000
shares at 10 par for
12.50 per share
Profit for 2020
Balances, 12/31/20
180,000
----
80,000
20,000
260,000
20,000
274,100
454,100
226,300
500,400
780,400