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Engineering Economics (Caraga State University)
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Philippine School of Business Administration
ACCOUNTING 13:
Accounting Policies,
Changes in Accounting Estimates
And Errors
Submitted to:
Prof. Rene Boy Ariola
Submitted by:
LITONJUA, KIM CAMILLE
MANLANGIT, CHARMAINE
MOLINA, CLAZELLE ANNE
OPPUS, KATHLEEN DEI
RAMIREZ, FATIMA
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THEORIES
1. Which of the following is not a counterbalancing error?
a. An understatement of purchases in the current period because the invoice was received
late.
b. Omission of depreciation for equipment purchased during the current period.
c. Omission of an adjustment to take up the unused supplies during the period.
d. Understatement of accrued salaries expense.
2. A company using a periodic inventory system neglected to record a purchase of merchandise on
account at year end. This merchandise was omitted from the year end physical count. How will
these errors affect assets, liabilities and equity at year end and net earnings for the year end?
Assets
Liabilities
Equity
Net Earnings
a. No Effect
b. No effect
c. Understated
d. Understated
Understated
Overstated
Understated
No effect
Overstated
Understated
No effect
Understated
Overstated
Understated
No effect
Understated
3. Which of the following if discovered in the accounting period subsequent to the period of
occurrence, requires an entity to report the correction of an error?
a. The estimate of useful life of a depreciable asset should have been revised.
b. A change from double declining to straight line depreciation.
c. Capitalization of an expense.
d. Change in percentage of sales used for determining bad debt expense.
4. Which of the following would cause income of the current period to be understated?
a.
b.
c.
d.
Capitalizing research and development cost.
Failure to recognize unearned rent revenue.
Changing from weighted average to FIFO for merchandise inventory.
Understating estimate of residual value.
5. At the end of the current year, special insurance costs, incurred but unpaid, were not recorded.
If these insurance costs were related to work in process, what is the effect of the omission on
accrued liabilities and retained earnings in the current year-end statement of financial
statement?
Accrued Liabilities
Retained Earnings
a.
b.
c.
d.
No effect
No effect
Understated
Understated
No effect
Overstated
No effect
Overstated
6. Which of the following errors would result in an overstatement of both current assets and
shareholders’ equity?
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a.
b.
c.
d.
An understatement of accrued sales commissions.
Noncurrent note receivable principal is misclassified as current asset.
Annual depreciation on manufacturing machinery is understated.
Holiday pay expense for administrative employees is misclassified as manufacturing
overhead.
7. Which of the following errors will not self-correct in the next year?
a.
b.
c.
d.
Accrued expenses not recognized at year-end.
Accrued revenue not recognized at year-end.
Depreciation expense overstated for the year.
Prepaid expenses not recognized at year-end.
8. Failure to record the expired amount of prepaid rent expense would not:
a.
b.
c.
d.
Understate expense
Overstate income
Overstate owners’ equity
Understate liabilities
9. The effect of a change in the expected pattern of consumption of economic benefit of a
depreciable asset shall be
a. Included in the determination of income or loss in the period of change only.
b. Included in the determination of income or loss in the period of change and future
periods.
c. Included in the statement of retained earnings as an adjustment in the beginning
balance.
d. Included in the other comprehensive income.
e.
10. A change from the straight line method depreciation of sum of year’s digits method is accounted
for as
a.
b.
c.
d.
Change in accounting policy
Change in accounting estimate
Prior period error
Accounting error
11. If at the end of reporting period, an entity erroneously excluded some goods from its ending
inventory and also erroneously did not record the purchase of these goods in its accounting
records, these error would cause,
a. The ending inventory cost of goods available for sale and retained earnings to be
understated.
b. The ending inventory cost of goods sold and retained earnings to be understated.
c. No effect on net income, working capital and retained earnings.
d. Cost of goods available for sale, cost of goods sold and net income to be understated.
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12. Failure to record depreciation at the end of an accounting period results in
a.
b.
c.
d.
Understated income
Understated assets
Overstated expenses
Overstated assets
13. An entity uses a periodic inventory system. If the entity’s beginning inventory in the current
year is overstated, that is the only error in the current year, then the entity’s income for the
current year would be
a.
b.
c.
d.
Understated and assets correctly stated
Understated and assets overstated
Overstated and assets overstated
Understated and assets understated
14. Which of the following statements is TRUE?
I.
A change in accounting principle is a change that occurs as the result of new information
or additional experience.
Errors in financial statements result from mathematical mistakes or oversight or misuse
of facts that existed when preparing the financial statements.
II.
a.
b.
c.
d.
Statement I only
Statement II only
Both statements
Neither I or II
15. Which of the following statements is TRUE?
I.
II.
Companies report changes in accounting estimates retrospectively.
When it is impossible to determine whether a change in principle or change in estimate
has occurred, the change is considered a change in estimate.
a.
b.
c.
d.
Statement I only
Statement II only
Both statements
Neither I or II
16. Which of the following statements is TRUE?
I.
II.
Companies for a change in depreciation methods as a change in accounting principle.
When companies make changes that result in different reporting entities, the change is
reported prospectively.
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a.
b.
c.
d.
Statement I only
Statement II only
Both statements
Neither I or II
17. Counterbalancing errors do not include
a.
b.
c.
d.
Errors that correct themselves in two years
Errors that correct themselves in three years
An understatement of purchases
An overstatement of unearned revenue
18. An example of a correction of an error in previously issued financial statements is a change
a.
b.
c.
d.
From the FIFO method of inventory valuation to the average method
In the service life of plant assets, based on changes in the economic environment
From the cash basis of accounting to the accrual basis of accounting
In the tax assessment related to a prior period
19. Accounting changes are often made and the monetary impact is reflected in the financial
statements of a company even though, in theory, this may be a violation of the accounting concept
of
a.
b.
c.
d.
Materiality
Consistency
Prudence
Objectivity
20. On December 31, 2010, special insurance costs, incurred but unpaid, were not recorded. If these
insurance costs were related to work in process, what is the effect of the omission on accrued
liabilities and retained earnings in the December 31, 2011 statement of financial position?
Accrued Liabilities
a.
b.
c.
d.
No effect
No effect
Understated
Understated
Retained Earnings
No effect
Overstated
No effect
Overstated
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PROBLEMS
MULTIPLE CHOICE
1. Tan, Inc. is a calendar-year corporation whose financial statements for 2011 and 2012 included
errors as follows:
YEAR
ENDING INVENTORY
DEPRECIATION EXPENSE
2011
P 162,000 overstated
P 135,000 overstated
2012
54,000 understated
45,000 understated
Assume that purchases were recorded correctly and that no correcting entries were made at
December 31, 2011, or at December 31, 2012. Ignoring income taxes, by how much should Tan’s
retained earnings be retroactively adjusted at January 1, 2013?
a.
b.
c.
d.
P144,000 increase
P36,000 decrease
P18,000 decrease
P9,000 increase
2. On January 1, 2011, Richmond Corp. acquired a machine at a cost of P500,000. It is to be
depreciated on the straight-line method over a five-year period with no residual value. Because
of a bookkeeping error, no depreciation was recognized in Richmond’s 2011 financial
statements. The oversight was discovered during the preparation of Richmond’s 2012 financial
statements. Depreciation expense on this machine for 2012 should be
a.
b.
c.
d.
P0
P100,000
P125,000
P200,000
3. Paulo Company began operations on January 1, 2011, and uses the FIFO method in costing its
raw material inventory. Management is contemplating a change to the average method and is
interested in determining what effect such a change will have on net income. Accordingly, the
following information has been developed:
FINAL INVENTORY
FIFO
Average
NET INCOME (Computed under the FIFO method)
2011
P320,000
240,000
2012
P360,000
300,000
500,000
600,000
Based upon the above information, a change to the average method in 2012 would result in net
income for 2012 of
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a.
b.
c.
d.
P540,000
P600,000
P620,000
P660,000
4. The retained earnings account of Jeric Corporation is reproduced below:
RETAINED EARNINGS
Date
2009
Jan. 1
Dec. 31
2010
Jan. 10
Mar. 6
Dec. 31
2011
Jan. 9
Dec. 31
Item
Debit
Balance
Net income for year
Credit
P 81,000
18,000
Dividends paid
Stock sold – excess over par
Net Loss for year
P 15,000
Dividends paid
Balance
15,000
89,800
P 131,000
32,000
11,200
P 131,000
The audit of the December 31, 2011, financial statements of the company reveals the following:
a. Dividends declared on December 10, 2009 and 2010 had not been recorded in the books until
paid.
b. Improvements in buildings and equipment of P 9,600 had been charged to expense at the end of
April 2008. Improvements are estimated to have an 8-year life. Antigua computes depreciation
to the nearest month and uses the straight-line depreciation.
c. The physical inventory of merchandise had been understated by P 3,000 at the end of 2009, and
by P 4,300 at the end of 2010.
d. Merchandise in transit and to which the company had title at December 31, 2010 and 2011 was
not included in the year-end inventories. These shipments of P 3,800 and P 5,500 were recorded
as purchases in January of 2011 and 2012, respectively.
e. The company had failed to recognize supplies on hand of P 1,200 and P 2,500 at the end of 2010
and 2011, respectively.
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f.
The company had failed to recognize supplies on hand of P 1,200 and P 2,500 at the end of 2010
and 2011, respectively.
g. The company reported a net loss of P 12,400 for the year ended December 31, 2011.
What is the corrected net loss of Jeric Corporation for the year ended December 31, 2011?
a. P 7,600
b. P 17,000
C. P 6,000
D. P 16,200
5. WAVSKI CO. Reported pretax incomes of P 505,000 and P 387,000 for the years ended
December 31, 2010 and 2011, respectively. However, the auditor noted that the following
errors had been made:
a. Sales for 2010 included amounts of P 191,000 which had been received in cash during 2010, but
for which the related goods were shipped in 2011. Title did not pass to the buyer until 2011.
b. The inventory on December 31, 2010, was understated by P 43,200.
c. The company’s accountant, in recording interest expense for both 2010 and 2011 on bonds
payable, made the following entry to an annual basis:
Interest Expense
Cash
75,000
75,000
The bonds have a face value of P 1,250,000 and pay a nominal interest rate of 6%. They were
issued at a discount of P 75,000 on January 1, 2010, to yield an effective interest rate of 7%.
d. Ordinary repairs to equipment had been erroneously charged to the Equipment account during
2010 and 2011. Repairs of P 42,500 and P 47,000 had been incurred in 2010 and 2011,
respectively. In determining depreciation charges, Chile applies a rate of 10% to the balance in
the Equipment account at the end of the year.
What is the corrected pretax income for 2011?
a. P 488,992
b. P 480,042
C. P 484,292
D. P 575,392
6. On January 1, 2011, management of CPA COMPANY decided to make a revision in the estimates
associated with its production equipment. The equipment was acquired in January 3, 2009, for
P 800,000 and had been depreciated using straight-line method. At the date of acquisition, it
had an estimated useful life of 10 years with an estimated salvage value of P 50,000.
Management has determined that the equipment’s remaining useful life is 4 years and that it
has an estimated residual value of P 60,000.
What is the amount of depreciation expense that should be recognized in 2011 as a result of the
changes in estimates?
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a. P 147,200
b. P 75,000
C. P 125,000
D. P 150,000
7. The unaudited books of TRESE Company showed the following information:
2012
2013
Profit
P195,000
P120,000
Inventory overstatement at year-end
36,000
Accrued expenses not recorded at year-end
40,000
Supplies inventory not recorded at year-end
15,000
What is the adjusted net income at December 31, 2013?
a. 191,000
c. 221,000
b. 301,000
d. 229,000
8. On January 1, 2012, ALEX Corporation acquired a machine at a cost of P200,000. It was to be
depreciated on the straight line method over a five year period with no residual value. Because
of a bookkeeping error, no depreciation was recognized in Alex’s 2012 financial statements. The
oversight was discovered during the preparation of Alex’s 2012 financial statements.
What is the depreciation expense on this machine for 2013?
a. 0
c. 80,000
b. 40,000
d. 120,000
9. SHIN Company began operations on January 1, 2012. Prior to any adjustments, the retained
earnings account is reproduced below.
1/1/12
12/31/12 Profit for the year
8/31/13 Dividends paid
12/31/13 Profit for the year
Debit
-
Credit
1,200,000
400,000
1,500,000
Balance
0
1,200,000
800,000
2,300,000
The company failed to properly recognize accruals and prepayments. Selected accounts
revealed the following information:
2012
2013
Prepaid expenses
80,000
60,000
Accrued expenses
25,000
40,000
Unearned income
110,000
50,000
Accrued income
70,000
100,000
A. What is the adjusted net income at December 31, 2012?
a. 1,175,000
c. 1,205,000
b. 1,265,000
d. 1,215,000
B. What is the adjusted net income at December 31, 2013?
a. 1,055,000
c. 1,555,000
b. 1,155,000
d. 1,955,000
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C. What is the adjusted retained earnings at December 31, 2013?
a. 2,355,000
c. 2,385,000
b. 2,370,000
d. 2,570,000
10. On December 30, 2013, FINE Company sold merchandise for 75,000 to Wise Company. The
terms of the sale were n/30, FOB shipping point. The merchandise was shipped on December
31, 2013, and arrived at Wise on January 2, 2014. Due to clerical error, the sale was not
recorded until January 2014 and the merchandise, sold at a 25% mark up on cost, was included
in Fine’s inventory at December 31, 2013.
As a result, Fine’s cost of goods sold for the year ended December 31, 2013 was?
a. Understated by 15,000
c. Understated by 60,000
b. Understated by 75,000
d. Overstated by 60,000
11. SEY Company has been using accrual basis of accounting. However, an examination of the
records reveals that some expenses and revenues have been handled on a cash basis by the
inexperienced bookkeeper of the company. The statements of comprehensive income prepared
by the bookkeeper reported P145,000 profit for 2012 and P185,000 profit for 2013. Further
review of the records reveals that the following items were handled improperly.
i.
ii.
iii.
Rent of 6,500 was received from a lessee on December 23, 2012 and credited to income.
This amount represents rent for 2013.
Invoices for office supplies purchased were charged to expense accounts upon receipt.
Inventories of supplies on hand at the end of each year have been ignored and no
adjusting entry has been made. Office supplies inventories at the end of 2011, 2012 and
2013 were P6,500, P3,700 and P7,100, respectively.
Salaries payable at the end of each year was consistently omitted from the records and
were recorded as expense when paid in the following year. Accrued salaries at the end
of 2011, 2012 and 2013 were P5,500, P7,500 and P4,700, respectively.
A. Adjusted net income for 2012.
a. 133,700
b. 113,700
B. Adjusted net income for 2013.
a. 190,600
b. 207,100
c. 148,700
d. 146,700
c. 197,700
d. 187,700
12. During 2013, Cadbury Company discovered that the ending inventories reported on its financial
statement were incorrect by the following amounts: 2011—60,000 understated; 2012—75,000
overstated. Cadbury Company uses the periodic inventory system to ascertain year-end
quantities that are converted to peso amounts using FIFO cost method.
A. By how much would retained earnings at January 1, 2013 be misstated prior to any
adjustments for these errors and ignoring income taxes?
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a.
b.
c.
d.
75,000 overstated
75,000 understated
15,000 overstated
15,000 understated
B. Effect in 2012 net income
a.
b.
c.
d.
135,000 overstated
60,000 understated
60,000 overstated
135,000 understated
13. During 2013, Kerr Company determined that machinery previously depreciated over a sevenyear life had a total estimated useful life of only five years. An accounting change was made in
2013 to reflect the change in estimate. If the change had been made in 2012, accumulated
depreciation would have been P800,000 on December 31, 2012, instead of P600,000. As a result
of this change, the 2013 depreciation expense was P50,000 greater. The income tax rate was
30%.
What should be reported in Kerr’s income statement for the year ended December 31, 2013 as
the cumulative effect on prior years of changing the estimated useful life of the machinery?
a.
b.
c.
d.
0
130,000
150,000
200,000
14. On January 1, 2008, Brazilia Company purchased for P4,800,000 a machine with a useful life of
ten years and a residual value of P200,000. The machine was depreciated by the doubledeclining balance method and the carrying amount of the machine was P3,072,000 on
December 31, 2009. Brazilia changed to straight line method on January 1, 2010. The residual
value did not change.
What should be the depreciation expense on this machine for the year ended December 31,
2010?
a.
b.
c.
d.
287,200
384,000
460,000
359,000
15. On January 1, 2009, Kevin Company purchased a machine for P2,750,000. The machine was
depreciated using the sum of year’s digits method based on a useful life of 10 years with no
residual value. On January 1, 2010, Kevin Company changed to the straight line method of
depreciation. Kevin Company can justify the change.
What is the depreciation of the machine for 2010?
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a.
b.
c.
d.
180,000
220,000
250,000
275,000
16. On January 1, 2006, Roma Company purchased heavy duty equipment for P4,000,000. On the
date of installation, it was estimated that the equipment has a useful life of 10 years and a
residual value of P400,000.
On January 1, 2010, the entity decided to review the useful life of the equipment and its residual
value and technical experts were consulted. The experts have determined that the useful life of
the equipment was 12 years from the date of acquisition and its residual value was P460,000.
What is the depreciation of the equipment for 2010?
a.
b.
c.
d.
175,000
262,500
360,000
300,000
17. Universal Company failed to accrue warranty cost of P100,000 in its December 31, 2009 financial
statements. In addition, a change from straight line to accelerated depreciation made at the
beginning of 2010 resulted in a cumulative effect of P60,000 on Universal’s retained earnings.
What amount before tax should Universal report as prior period error in 2010?
a.
b.
c.
d.
100,000
160,000
60,000
0
18. On January 1, 2009, Aker Company acquired a machine at a cost of P2,000,000. The machine is
depreciated on the straight line method over a five-year period with no residual value. Because
of a bookkeeping error, no depreciation was recognized in Aker’s 2009 financial statements. The
oversight was discovered during the preparation of Aker’s 2010 financial statements. What is
the depreciation expense on the machine for 2010?
a.
b.
c.
d.
800,000
400,000
500,000
0
19. The draft financial statements for Savior Company for the year ended December 31, 2010 have
been prepared. A final review of the draft reveals an overvaluation of the ending inventory of
P2,000,000 on December 31, 2009. Further investigation shows that there was an overvaluation
of ending inventory on December 31, 2008 of P1,200,000.
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What adjustment should be made to the profit for the year ended December 31, 2009
presented as the comparative figure in the 2010 financial statements?
a.
b.
c.
d.
2,000,000 decrease
1,200,000 decrease
800,000 decrease
0
20. After the issuance of its 2009 financial statements, Narra Company discovered a computational
error of P150,000 in the calculation of its December 31, 2009 inventory. The error resulted in a
P150,000 overstatement in the cost of goods sold for the year ended December 31, 2009. In
October 2010, Narra paid the amount of P500,000 in settlement of litigation instituted against it
during 2009. Ignore income tax.
In the 2010 financial statements, what is the adjustment of the retained earnings on January 1,
2010?
a.
b.
c.
d.
150,000 credit
350,000 debit
500,000 debit
650,000 credit
21. The audited income statement of Manuel Co. shows a net income of P350000 for the year
ended December 31, 2012. Adjustments were made for the following errors:
i.
ii.
iii.
December 31, 2011, inventory overstated by P45000.
December 31, 2012, inventory understated by P75000.
A P20000 customer’s deposit received in December 31, 2012, was credited to sales in 2012. The
goods were actually shipped in January 2013.
What is the unadjusted net income of Manuel Co. for the year ended December 31, 2012?
a. P340000
c. P400000
b. P468000
d. P250000
22. On January 1, 2012, management of Danzelle Company decided to make a revision in the
estimates associated with its production equipment. The equipment was acquired on January 3,
2010 for P1600000 and had been depreciated using a straight-line method. At the date of
acquisition, it had an estimated life of 10 years with an estimated salvage value of P100000.
Management has determined that the equipment’s remaining useful life is 4 years and that it
has an estimated residual value of P120000. What is the amount of depreciation expense that
should be recognized in 2012 as a result of the changes in estimate?
a. P150000
b. P250000
c. P295000
d. P300000
23. In the past, Perez Company has depreciated its computer hardware using the straight-line
method. The computer hardware has a 10 % salvage value and an estimated useful life of 5
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years. As a result of rapid advancement in information technology, management of Perez has
determined that it receives most of the benefits from its computer facilities in the first few years
of ownership. Hence, as of January 1, 2012 Perez purposes changing to the sum-of-years’-digits
method for depreciating its computer hardware. The following computer purchase was made by
Perez at the beginning of the year.
2011
60000
How much depreciation expense was recorded by Perez in 2012?
a. P 17280
c. P43200
b. P 10800
d. P23060
24. The December 31 year-end financial statements of Tarel Company contained the following
errors:
December 31, 2011
December 31, 2012
Ending inventory
P 48000 understated
P 40500 overstated
Depreciation expense
P 11500 understated
-------An insurance premium of P 330000 was prepaid in 2011 covering the years 2011, 2012 and
2013. The entire amount was charged to expense in 2011. In addition, on December 31, 2012, a fully
depreciated machinery was sold for P 75000 cash, but the sale was not recorded until 2013. There were
no other errors during 2011 and 2012, and no corrections have been made for any error. Ignore income
tax effects.
What is the total effect of the errors on Tarel’s 2012 net income?
a. P 27500 overstatement
c. P 192500 understatement
b. P 177500 understatement
d. P 123500 overstatement
25. On January 1, 2010, Keith Corporation acquired machinery at a cost of P600,000. Keith adopted
the straight-line method of depreciation for this machine and had been recording depreciation
over an estimated useful life of ten years, with no residual value. At the beginning of2013, a
decision was made to change to the double-declining balance method of depreciation for this
machine.
A. Assuming a 30% tax rate, the effect of this accounting change on beginning retained earnings,
is
a. P67,200
b. P0
c. P78,960
d. P112,800
B. The amount that Keith should record as depreciation expense for 2013 is
a. P60,000
b. P84,000
c. P120,000
d. P0
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COMPREHENSIVE PROBLEMS
I. Tan Corporation’s current assets and liabilities section of the statement of financial position as of
December 31, 2010 appear as follows:
Current assets
Cash
Accounts Receivable
Less allowance for doubtful accounts
Inventories
Prepaid expenses
Total current assets
P1,200,000
P2,670,000
210,000
Current liabilities
Accounts payable
Notes payable
Total current liabilities
2,460,000
5,130,000
270,000
P9,060,000
P1,830,000
2,010,000
P3,840,000
The following errors in the corporation’s accounting have been discovered:
a. January 2011 cash disbursements entered as of December 2010 included payment of accounts
payable in the amount of P1,170,000, on which a cash discount of 2% was taken.
b. The inventory included P810,000 of merchandise that have been received at December 31 but for
which no purchase invoices have been received or entered. Of this amount P360,000 had been received
on consignment; the remainder was purchased f.o.b. destination, terms 2/10, n/30.
c. Sales for the first four days in January 2011 in the amount of P900,000 were entered in the sales book
as December 31, 2010. Of these, P645,000 were sales on account and the remainder were cash sales.
d. Cash, not including cash sales, collected in January 2011 and entered as of December 31, 2010,
totaled P1,059,720. 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, 2010
2. Adjusted accounts receivable balance as of December 31, 2010
3. Adjusted accounts payable balance as of December 31, 2010
4. Adjusted working capital as of December 31, 2010
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II. Speed R Corporation reported net income as follows:
2011
15,000,000
2012
20,000,000
2013
28,000,000
An audit of the records disclosed the following:





Accounts receivable instead of notes receivable was debited in 2013.
200,000
Purchases account was debited in 2013 instead of office supplies.
50,000
The physical inventory on December 31, 2011 was overstated.
100,000
The physical inventory on December 31, 2012 was understated.
150,000
Advances to suppliers were recorded as purchases but the merchandise was received in
subsequent year:
2011
300,000
2012

400,000
Advances from customers recorded as sales but the goods were delivered in the following year:
2011
250,000
2012


500,000
Insurance premium for three years paid in 2011 was charged entirely to expense in 2011.
150,000
Salaries accrued not recorded:
2011
300,000
2013


600,000
Rent for two years received in 2012 was entirely credited to income.
Unrecorded accrued interest receivable:
2012
2013


100,000
100,000
250,000
Improvements on building had been charged to expense on January 1, 2012. Improvements
have a life of five years.
1,000,000
On January 1, 2012, an equipment costing 40,000 was sold for 20,000. At the date of sale, the
equipment had an accumulated depreciation of 25,000. The cash received was recorded as
other income in 2012.
What is the adjusted net income for (5.) 2011, (6.) 2012, and (7.) 2013?
8. What is the retained earnings for 2013?
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III. You were engaged by Lanao Company to audit its financial statements for the first time. In examining
the books, you found out that certain adjustments had been overlooked at the end of 2009 and 2010.
You also discovered that other items had been improperly recorded. These omissions and other failures
for each year are summarized below:
12/31/10
12/31/09
Salaries Payable
780,000
873,600
Interest Receivable
213,000
259,200
Prepaid Insurance
307,800
384,000
561,000
470,400
522,000
564,000
Advances from customers (collections from
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
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:
9. What is the net effect of the errors on the 2009 profit?
10. What is the net effect of the errors on the 2010 profit?
11. What is the net effect of the errors on the company’s working capital at December 31, 2010?
12. What is the net effect of the errors on the balance of the company’s retained earnings at
December 31, 2010?
IV. The following information pertains to Molina Company’s depreciable assets:
1. Machine X was purchased for P150000 on January 1, 2008. The entire cost was expensed in the
year of the acquisition. The estimated useful life of this machine is 15 years with no residual
value.
2. Machine Y cost P525000 and was acquired on January 1, 2009. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight-line method depreciation
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was made. On January 2, 2013, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25000 residual value.
3. A building was purchased on January 3, 2010, for P3000000. The building was expected to have
a useful life of 20 years with no residual value. The straight-line depreciation method was used.
On January 1, 2013, a change was made to the sum-of-the-years’-digits method of depreciation.
No change was made to the estimated useful life and residual value of the building.
The adjusting entry on January 1, 2013, relative to machine X should include a credit to
a. Accumulated depreciation of P60000
b. Retained earnings of P100000
c. Machinery of P150000
d. No adjusting entry is necessary
13. What is the carrying value of machine Y on January 1, 2013?
14. What is the depreciation expense of machine Y for 2013?
15. What is the book value of the building at December 31, 2012?
16. What is the book value of the building on December 31, 2013?
V. Madam Corporation reported the following amounts of net income for the years ended December 31,
2010, 2011 and 2012:
2010
2011
2012
P127,000
150,000
128,500
You are performing the audit for the year ended December 31, 2012. During your examination, you
discover the following errors:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2011
P14,000 understated
December 31, 2012
P23,000 overstated
b. On December 29, 2012, Madam recorded as purchase merchandise in transit which
costP15,000. The merchandise was shipped FOB destination and had it arrived by December
31. The merchandise was not included in the ending inventory.
c. Madam records sales on the accrual basis but failed to record sales on account made near
the end of each year’s follows:
2010
2011
2012
P4,000
5,000
3,500
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d. The company failed to record accrued office salaries as follows:
December 31, 2010
P10,000
December 31, 2011
14,000
e. On March 1, 2011, a 10% stock dividend was declared and distributed. The par value of the
shares amounted to P10,000 and market value was P13,000. The stock dividend was
recorded as follows:
Miscellaneous expense
13,000
Ordinary share capital
10,000
Retained earnings
3,000
f.
On July 1, 2011, Madam acquired a three-year insurance policy. The three- year premium of
P6000 was paid on that date, and the entire premium was recorded as insurance expense.
g. On January 1, 2012, Madam retired bonds with book value of P120,000 for P106,000. The
gain was incorrectly deferred and is being amortized over 10 years as a reduction of interest
expense on other outstanding obligations.
17. What is the adjusted net income for the year ended December 31, 2010?
18. What is the adjusted net income for the year ended December 31, 2011?
19. What is the adjusted net income for the year ended December 31, 2012?
20. What is the adjusting entry should be made on December 31, 2012 to correct the error described in
item B?
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THEORIES:
Answers:
1. B
6. D
11.C
16.D
2. C
7. C
12.D
17.B
3. C
8. D
13.A
18.C
4. D
9. B
14.C
19.B
5. C
10.B
15.B
20.C
SOLUTIONS:
MULTIPLE CHOICES
1.
A
Understatement of 2012 ending inventory
Overstatement of 2011 depreciation expense
Understatement of 2012 depreciation expense
2.
B
Depreciation Expense
Retained Earnings
Accumulated Depreciation
RETAINED EARNINGS
P54,000 increase
135,000 increase
(45,000) decrease
P144,000 increase
P100,000**
100,000*
P200,000
Acquisition cost
P500,000
Useful life
/ 5 years
Depreciation expense for 2011
P100,000*
(Since the book for 2011 is closed, the understatement
of depreciation expense will be adjusted
to the Retained Earnings account)
Depreciation expense for 2012
3.
4.
P100,000**
C
Net income for 2012 under FIFO method
Change in final inventory from FIFO to average method
(P360,000 – 300,000)
Net income for 2012 under FIFO method
D
Reported net income (loss)
P600,000
60,000
P540,000
P (12,400)
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Omission of depreciation
Understatement of physical inventory at
Dec. 31, 2010
Overstatement of sales commissions expense
(P 2,100 – P1,700)
Overstatement of supplies expense (P2,500 – P1,200)
Corrected net income (loss)
5.
400
1,300
P (16,200)
2010
2011
P 505,000
P 387,000
(191,000)
191,000
43,200
(43,200)
(7,250) ( 7,758)
(42,500)
(47,500)
4,250
8,950
P 311,700
P 488,992
A
Cost of equipment
Less: Accumulated depreciation,
Dec. 31, 2010 (P 75,000 x 2)
Book value, Jan. 1, 2010
Less: Revised salvage value
Remaining depreciable cost
Divide by revised useful life
Revised annual depreciation
7.
(4,300)
A
Pretax income
Sales revenue erroneously recognized in 2010
Understatement of 2010 ending inventory
Understatement of bond interest expense
Ordinary repairs erroneously capitalized
Overstatement of depreciation
Corrected pretax income
6.
(1,200)
P 800,000
150,000
650,000
60,000
590,000
÷ 4 yrs.
P 147,500
B
2012
195,000
(36,000)
(40,000)
Unadjusted profit
Inventory -2012 overstated
Accrued expenses not recorded
Supplies not recorded
ADJUSTED NET INCOME
119,000
8.
B
Machine= 200,000/5ys= 40,000
9.
(A.) D;
(B.)B;
Unadjusted balance
Prepaid expenses
Accrued expenses
2013
210,000
36,000
40,000
15,000
301,000
(C.)B
2012
1,200,000
80,000
(25,000)
2013
1,500,000
(80,000)
(60,000)
25,000
(40,000)
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RE
1,500,000
(60,000)
(40,000)
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Unearned income
(110,000)
Accrued income
70,000
Dividends paid
ADJUSTED NET INCOME
10.
110,000
(50,000)
(70,000)
100,000
400,000
1,155,000
(400,000)
1,215,000
(50,000)
100,000
2,370,000
C
The December 31, 2013 inventory was overstated. Therefore, cost of goods sold for
2013 was understated by 60,000 (75,000/125%)
11.
(A.) A;
(B.)C
2012
145,000
(6,500)
Unadjusted income
Unearned rent
Office supplies not recorded
2013
185,000
6,500
(6,500)
(3,700)
7,100
3,700
Accrued Salaries
5,500
(7,500)
133,700
12.
(A.) A ;
7,500
(4,700)
197,700
(B.) B
Inventor - understated
-overstated
2012
60,000
_____
2013
Retained Earnings
(60,000)
(75,000)
(75,000)
60,000
13.
A
The change in estimated useful life is a change in accounting estimate. Accordingly, there is no
cumulative effect.
14.
D
Depreciation for 2010 (3,072,000 – 200,000 / 8) 359,000
15.
C
SYD (1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10)
55
Cost – January 1, 2009
2,750,000
Accumulated Depreciation – January 1, 2010
(10/55 x 2,750,000)
(500,000)
Carrying Amount – January 1, 2010
2,250,000
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Straight line depreciation for 2010
(2,250,000 / 9 years remaining)
16.
250,000
B
Cost – January 1, 2006
4,000,000
Accumulated depreciation – January 1, 2010
(4,000,000 – 400,000 / 10 x 4)
1,440,000
Carrying amount – January 1, 2010
2,560,000
Depreciation for 2010 (2,560,000 – 460,000/8)
17.
262,500
A
Only the unrecorded warranty cost of P100,000 on December 31, 2009 should be accounted for
as a prior period error. The change from straight line to accelerated depreciation is accounted
for as a change in accounting estimated and therefore should be treated currently and
prospectively.
18.
B
Depreciation for 2010 (2,000,000 / 5)
400,000
The under depreciation of P400,000 in 2009 is reported as a prior period error in the statement
of retained earnings.
19.
C
Overvaluation of 12/31/2009 inventory
Overvaluation of 12/31/2008 inventory
Net decrease in 2009 profit
20.
A
Inventory – January 1, 2010
Retained Earnings
150,000
150,000
Litigation loss
Cash
21.
(2,000,000)
1,200,000
(800,000)
500,000
500,000
D
Unadjusted net income
December 31, 2011, inventory overstated
December 31, 2012, inventory understated
Customer’s deposit recognized as sales revenue
Adjusted net income
P250000
45000
75000
( 20000)
P350000
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22.
C
Cost of equipment
Less: Accumulated depreciation,12/31/2011
( 150000 x 2 )
Book value, 1/1/2012
Less: Revised salvage value
Remaining depreciable cost
Divide by revised useful life
Revised annual depreciation
23.
300000
1300000
120000
1180000
4
P 295000
A
Cost
Less: Accumulated depreciation
(P60000 x 90% / 5)
Book value, January 1, 2012
Less: Salvage value (10% x 60000)
Remaining depreciable cost
SYD rate [4 x (4+1)/2]
Depreciation expense in 2012
24.
P1600000
P60000
10800
49200
6000
43200
x 4/10
P 17280
D
Understatement of 2011 ending inventory
Overstatement of 2012 ending inventory
Prepaid insurance charged to expense in 2012
(330000/3)
Unrecorded sale of fully depreciated machinery in 2012
Total effect of errors on net income
25. (A.) B;
P 48000
40500
110000
(75000)
P 123500
(B.) C
Cost
Accumulated Depreciation
(600,000 x 3/10)
Carrying Value
Depreciation expense
P600,000
180,000
420,000
X 2/7
P120,000
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COMPREHENSIVE PROBLEMS
I.
Question No.1
Unadjusted cash balance
January cash payments (P1,170,000 * .98)
January cash sales (P900,000 – P645,000)
January cash collections and load proceeds
Adjusted cash balance
P1,200,000
1,146,600
(255,000)
(1,059,720)
P1,031,880
Question No.2
Unadjusted accounts receivable
January sales on account
January collections on AR (P699,720/.98)
Adjusted accounts receivable
P2,670,000
(645,000)
714,000
P2,739,000
Question No.3
Unadjusted accounts payable
January payments on AP
Unrecorded purchases (P810,000 – P360,000)
Adjusted accounts payable
P1,830,000
1,170,000
450,000
P3,450,000
Question No.4
Current assets:
Cash
P1,031,880
Accounts receivable
2,739,000
Allowance for doubtful accounts
(210,000)
Inventories (P5,130,000 – P360,000)
4,770,000
Prepaid expenses
270,000
Less current liabilities:
Accounts payable
3,450,000
Notes payable [P2,010,000 – (P1,059,720 – P699,720)] 1,650,000
Working capital
P8,600,000
5,100,000
P3,500,880
II.
2011
2012
2013
Retained
1,500,000
2,000,000
2,800,000
(10,000)
10,000
15,000
(15,000)
(15,000)
(30,000)
40,000
(40,000)
(40,000)
Earnings
Net income
a. No effect
b. No effect
c. 2011 inventory overstated
d. 2012 inventory understated
e. Advances recorded as purchases
2011
2012
30,000
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f. Advances recorded as sales
2011
2012
g. Insurance premium-2009
h. Salaries accrued unrecorded
2011
2013
i. Rent income
j. Interest receivable unrecorded
2012
2013
k. Improvements DR to expense
Depreciation
l. Overstatement of other income
(25,000)
10,000
25,000
(50,000)
(5,000)
(30,000)
30,000
(5,000)
10,000
50,000
(5,000)
50,000
(5,000)
(60,000)
5,000
5,000
(10,000)
25,000
(10,000)
100,000
(100,000)
(20,000)
(20,000)
20,000
_
_
15,000__
15,000
(5.)1,475,000 (6.) 2,105,000 (7.) 2,730,000 (8.) 80,000
III.
Salaries Payable
2009
2010
Interest Receivable
2009
2010
Prepaid Insurance
2009
2010
Advances from customers
2009
2010
Machinery
2009
Profit
2009
Profit
2010
WC
12/31/10
RE
12/31/10
873,600
(873,600)
780,000
780,000
780,000
259,200
(213,000)
(213,000)
(213,000)
384,000
(307,800)
(307,800)
(307,800)
(470,400)
561,000
561,000
561,000
(259,200)
(384,000)
470,400
(564,000)
28,200
2010
Over (under)
165,000
(564,000)
84,600
(522,000)
26,100
56,400
(522,000)
26,100
(320,100)
820,200
IV.
Machinery X
Accumulated depreciation-Machinery
(P150000x 5/15)
Retained earnings
150000
50000
100000
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Cost of machine Y
Less: Accumulated depreciation
(P525000x 4/12)
Carrying value, Dec. 31, 2012
175000
P350000
Carrying value, Dec. 31, 2012
Less: Salvage value
Remaining depreciable cost
Divided by revised remaining life
Depreciation for 2013
P350000
25000
325000
4 years
P 81250
Cost of building
Less: Accumulated depreciation, 12/31/12
(P3000000x3/20)
Book value of building, Dec. 31, 2013
P3000000
450000
Book value of building, Dec. 31, 2012
Less: Depreciation for 2013
(P2550000x17/153)
Book value of building, Dec. 31, 2013
P525000
P2550000
P2550000
283333
P2266667
SYD= 17[(17+1)/2]= 153
V.
Reported net income
a. 2011 ending inventory understated
2012 ending inventory overstated
b. 2013 purchase recorded in 2012
c. Unrecorded sales on account:
2010
2011
2012
d. Unrecorded accrued salaries:
2010
2011
e. Stock dividend charged to expense
f. Insurance premium expensed
g. Deferred gain on bond retirement
Amortization of deferred gain
Adjusted net income
ADJUSTING ENTRY:
Accounts payable
Purchases
2010
P127,000
4,000
(10,000)
P121,000
2011
P150,000
14,000
-
2013
P128,500
(14,000)
(23,000)
15,000
(4,000)
5,000
-
(5,000)
3,500
10,000
(14,000)
13,000
5,000
P179,000
14,000
(2,000)
14,000
(1,400)
P129,600
15,000
15,000
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