CHAPTER 2 – Accounting for
Correction of Errors
Exercises
1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy for 3
years. On December 31, 2006, Rosete’s unadjusted trial valance showed a balance of
P270 for prepaid insurance and P13,230 for insurance expense. What amounts should
be reported for prepaid insurance and insurance expense in Rosete’s December 31, 2006
financial statements?
Prepaid Insurance
Insurance Expense
a.
P 9,900
P 3,600
b.
P 10,200
P 3,600
c.
P 10,200
P 3,300
d.
P 10,200
P 3,030
2. An analysis of Palmes Corporation’s unadjusted prepaid expense account at December
31, 2006 revealed the following:



An opening balance at P6,000 for Palmes comprehensive insurance policy. Palmes
had paid an annual premium of P12,000 on July 1, 2005.
A P12,800 annual insurance premium payment made July 1, 2006.
A P8,000 advance rental payment for a warehouse Palmes leased for 1 year
beginning January 1, 2006.
In its December 31, 2006 balance sheet, what amount should Palmes report as prepaid
expenses?
a. P 20,400
b. P 14,400
c. P 8,000
d. P 6,400
3. On October 1, 2006, a company sold services to a customer and accepted a note in
exchange with a P120,000 face value and an interest rate of 10%. The note requires
that both the principal and interest be paid at the maturity date, December 1, 2007.
The company’s accounting period is the calendar year. What adjusting entry (related to
this note) will be required at December 31, 2006 on the company’s books?
a. Deferred interest income
3,000
Interest receivable
b. Interest income
3,000
Interest receivable
c. Interest receivable
3,000
Deferred interest income
d. Interest receivable
3,000
Interest income
3,000
3,000
3,000
3,000
4. What is the purpose of the following entry?
Supplies
xxxx
Supplies expense
xxxx
a. To recognize supplies used, if purchases of supplies are recorded in supplies.
b. To recognize supplies on hand, if purchases of supplies are recorded in supplies
expense.
1
c. To record the purchase of supplies during or at the end of the period.
d. To close the expense account for supplies at the end of the period.
5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry
could be made on January 1?
a. Wages expense
15,000
Wages payable
15,000
b. Prepaid expense
15,000
Wages expense
15,000
c. Wages expense
15,000
Prepaid wages
15,000
d. Wages payable
15,000
Wages expense
15,000
6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance
was debited. Assuming a December 31 year-end, what is the reversing entry at the
beginning of the next period?
a. None is required.
b. Cash
6,000
Prepaid insurance
6,000
c. Prepaid insurance
5,500
Insurance expense
5,500
d. Insurance expense
500
Prepaid insurance
500
7. A consulting firm started and completed a project for a client in December 2006. The
project has not been recorded on the consulting firm’s books, and the firm will not
receive payment from the client until February 2007. The adjusting entry that should be
made on the books of the consulting firm on December 31, 2006, the last day of the
firm’s fiscal year, is
a. Cash in transit
xxx
Consulting revenue
xxx
b. Consulting revenue receivable
xxx
Consulting revenue
xxx
c. Unearned consulting rev.
xxx
Consulting revenue
xxx
d. Consulting revenue receivable
xxx
Unearned consulting revenue
xxx
8. Cristie Company sublet a portion of its warehouse for 5 years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Cristie
recorded as a credit to calendar-year basis. The adjustment on December 31 of the first
year should be
a. No Entry.
b. Unearned rental income
2,500
Rental income
2,500
c. Rental income
2,500
Unearned rental income
2,500
d. Unearned rental income
12,500
Rental income
12,500
2
9. After a successful drive aimed at members of a specific national association, Online
Company received a total of P180,000 for 3-year subscriptions beginning April 1, 2006,
and recorded this amount in the unearned revenue account. Assuming Online records
adjustment only at the end of the calendar year, the adjusting entry required to reflect
the proper balances in the accounts at December 31, 2006 is to
a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000.
b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000.
c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000.
d. Debit unearned revenue for P45,000 and credit subscription revenue for P45,000.
10. Jay Corporation renewed an insurance policy for 3-years beginning July 1, 2006 and
recorded the P81,000 premium in the prepaid insurance accounts.
The P81,000
premium represents an increase of P23,400 from the P57,600 premium charged 3 years
ago. Assuming Jay'’ records its insurance adjustments only at the end of the calendar
year, the adjusting entry required to reflect the proper balances in the insurance
accounts at December 31, 2006, Jay’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.
11. The 2006 financial statements of Hershey Company reported net income for the year
ended December 31, 2006 of 2 million. On July 1, 2007, subsequent to the issuance of
the 2006 financial statements, Hershey changed from an accounting principle that is not
generally accepted to one that is generally accepted. If the generally accepted
accounting principle had been used in 2006, net income for the year ended December
31, 2006 would have been decreased by 1 million. On August 1, 2007, Hershey
discovered a mathematical error relating to its 2006 financial statements. If this error
had been discovered in 2006, net income for the year ended would have been increased
by P500,000.
What amount, if any, should be included in net income for the year ended December 31,
2007 because of the items noted above?
a. P 0
c. P 500,000 increase
b. P 500,000 decrease
d. P 1,000,000 decrease
12. Edcelle Company reported a retained earnings balance of P400,000 at December 31,
2005. In August 2006, Edcelle determined that insurance premiums of P60,000 for the
3-year period beginning January 1, 2005 had been paid and fully expensed in 2005.
Edcelle has a 30% income tax rate.
What amount should Edcelle report as adjusted beginning retained earnings in its 2006
statement of retained earnings?
a. P 442,000
b. P 440,000
c. P 428,000
d. P 420,000
13. Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31,
2005 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2006 resulted in a cumulative effect of P30,000
on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related
income taxes.
What amount should Colasissi report as prior period adjustments in 2006?
a. P 0
b. P 30,000
c. P 50,000
d. P 80,000
3
Questions 14 and 15 are based on the following information.
On October 1, 2006, Yuri Retailers signed a 4-month, 16% note payable to finance the
purchase of holiday merchandise. At that date, there was no direct method of pricing the
merchandise, and the note’s market rate of interest was 11%. Yuri recorded the
purchase at the note’s face amount. All of the merchandise was sold by December 1,
2006. Yuri’s 2006 financial statements reported interest payable and interest expense
on the note for 3 months at 16%. All amounts due on the note were paid February 1,
2007.
14. Yuri’s 2006 cost of goods sold for the holiday merchandise was
a. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value.
b. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value plus 11% interest for 2 months.
c. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value.
d. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value plus 11% interest for 2 months.
15. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which
of the following items was reported correctly?
a.
b.
c.
d.
12/31/06
Retained earnings
Yes
No
Yes
No
12/31/06
Interest payable
Yes
No
No
Yes
16. On December 31, 2006, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The
terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2006 and arrived at Fineafle on January 5, 2007. Because of a clerical
error, the sale was not recorded until January 2007, and the merchandise, sold at 25%
markup, was included in Excel’s inventory at December 31, 2006.
As a result, Excel’s cost of goods sold for the year ended December 31, 2006 was
a. Understated by P 75,000
c. Understated by P 15,000
b. Understated by P 60,000
d. Correctly stated
17. For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by
workers during the last week of the year. The amounts omitted, which are considered
material, were as follows:
December 31, 2003
December 31, 2005
December 31, 2006
P56,000
51,000
64,000
The entry on December 31, 2006 to correct for these omissions would include a
a. Credit to wage expense for P64,000
b. Debit to wage expense for P51,000
c. Debit to wage expense for P13,000
d. Credit to retained earnings for P64,000
4
18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors
made at December 31, 2006:
Failed
Failed
Failed
Failed
to
to
to
to
accrue P50,000 interest expense
record depreciation expense on office equipment of P80,000
amortize prepaid rent expense of P100,000
delay recognition of prepaid advertising expense of P60,000
The net effect of these errors was to overstate net income for 2006 by
a. P 130,000
b. P 170,000
c. P 230,000
d. P 290,000
19. While preparing its 2006 financial statements, Falfact Corp. discovered computational
errors in its 2005 and 2004 depreciation expense. These errors resulted in
overstatement of each year’s income by P25,000, net of income taxes. The following
amounts were reported in the previously issued financial statements:
2005
2004
Retained earnings, 1/1
P 700,000
P 500,000
Net income
150,000
200,000
Retained earnings, 12/31
P 850,000
P 700,000
Falfact’s 2006 net income is correctly reported at P180,000. Which of the following
amounts should be reported as prior-period adjustments and net income in Falfact’s
2006 and 2005 comparative financial statements?
Year
a. 2005
2006
b. 2005
2006
c. 2005
2006
d. 2005
2006
Prior period adjustment
P (50,000)
(50,000)
(25,000)
-
Net income
P150,000
180,000
150,000
180,000
125,000
180,000
125,000
180,000
20. The following information appeared on Blight Inc.’s December 31 financial statements:
2005
2006
Assets
P 1,000,000
P1,200,000
Liabilities
750,000
800,000
Contributed capital
120,000
120,000
Dividends paid
100,000
60,000
In preparing its 2006 financial statements, Blight discovered that it had misplaced a
decimal in calculating depreciation for 2005. This error overstated 2005 depreciation by
P10,000. In addition, changing technology had significantly shortened the useful life of
Blight’s computers. Based on this information, Blight determined that depreciation
should be P30,000 higher in 2006 financial statements.
Assuming that no correcting or adjusting entries have been made and ignoring income
taxes, how much should Blight report as 2006 net income?
a. P 230,000
b. P 210,000
c. P 180,000
d. P 170,000
5
Questions 21 and 22 are based on the following information.
An audit of Angelina Company has revealed the following four errors that have occurred
but have not been corrected:




Inventory at December 31, 2005-P40,000, understated
Inventory at December 31, 2006-P15,000, overstated
Depreciation for 2005-P7,000, understated
Accrued expenses at December 31, 2006-P10,000, understated
21. The errors cause the reported net income for the year ending December 31, 2006 to be
a. Overstated by P72,000
c. Understated by P28,000
b. Overstated by P65,000
d. Understated by P45,000
22. The errors cause the reported retained earnings at December 31, 2006 to be
a. Overstated by P65,000
c. Overstated by P25,000
b. Overstated by P32,000
d. Understated by P18,000
23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to
cash of P50,500 and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500
24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect
c. Is understated by P9,000
b. Is overstated by P9,000
d. Is understated by P23,000
25. The beginning accumulated depreciation per record was P100,000. During the year, the
firm sold one of its machines recorded as follows:
Cash
270,000
Accumulated depreciation - machine 30,000
Machine
300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
a. Cash
300,000
Machine
300,000
b. Cash
30,000
Gain on sale of machine
30,000
c. Accumulated depreciation - machine 30,000
Gain on sale of machine
30,000
d. Cash
300,000
Machine
270,000
Gain on sale of machine
30,000
26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.
6
27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when
nominal accounts were already closed to income summary, but not yet closed to the
capital account. The correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases
c. P2,700 credit to purchases
d. P2,700 credit to accounts payable
28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously
recorded as P56,000. The error had been discovered when all nominal and temporary
accounts were already closed to the real account. The correcting entry would require a
a. Debit to capital account
c. Credit to cost of sale
b. Debit to income summary account
d. Credit to owner’s capital
29. A sales discount of P5,000 was recorded as purchase discount. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P5,000 debit to purchase discount
c. P5,000 credit to sales discount
b. P5,000 credit to purchase discount
d. P5,000 credit to accounts payable
30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries
expense. The error had been discovered when all temporary accounts were already
closed to the capital account. The correcting entry will require a
a. P20,000 debit to owner’s capital
c. P20,000 debit to salaries expense
b. P20,000 debit to owner’s drawings
d. No correcting entry is necessary
31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been
discovered when nominal accounts were already closed. The correcting entry would
require a
a. P20,000 debit to rent expense
c. P40,000 credit to rent income
b. P20,000 debit to rent income
d. No adjustment entry is necessary
32.A cash collection of P5,000 from customer’s open account was recorded as P500. The
error had been discovered when nominal accounts were still open. The correcting entry
would require a
a. P4,500 debit to accounts receivable
c. P500 credit to accounts receivable
b. P4,500 debit to cash
d. P500 credit to cash
33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had
been discovered when nominal accounts were already closed. The correcting would
require a
a. P900 debit to cash.
c. P900 debit to sale
b. P900 debit to accounts receivable
d. P900 credit to accounts receivable
34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit
to cash P5,500 and credit to notes receivable P5,500. The error had been discovered
when nominal accounts were still open. The correcting entry would require a
a. P500 debit to cash.
c. P500 credit to cash
b. P500 debit to accounts receivable
d. P500 credit to interest income
7
35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with
a face value of P100,000 was not taken up as of December 31, 2004. The collection of
the note, which matured on January 31, 2007, was recorded as
Cash
102,000
Notes receivable
100,000
Interest Income
2,000
The error was discovered after collection. The correcting entry would require a
a. P2,000 debit to cash.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income
36.A return of merchandise amounting to P4,500 which was previously purchased on
account was recorded as
Accounts payable
Purchases
5,400
5,400
If the error had been discovered when the nominal accounts were still open, the
correcting entry would require a
a. P900 debit to purchase return
b. P900 debit to accounts payable
c. P900 credit to purchases
d. P900 credit to accounts payable
Answer:
1. c
2. a
3, d
4, b
5. d
6. a
7. b
8. d
9. d
10. d
11. d
12. c
13. c
14. a
15. d
16. b
17. c
18. b
19. a
20. c
21. b
22. b
23. c
24. a
25. b
26. c
27. b
28. c
29. b
30. d
31. d
32. b
33. b
34. d
35. c
36. d
8
Problem 1
The first audit of the books of Luzon Company was made for the year ended December 31,
2006. In examining the books, the auditor found that certain items had been overlooked or
incorrectly handled in the last 3 years. These items are:
a. At the beginning of 2004, the company purchased a machine for P1,020,000 (salvage
value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base
for the 3 years.
b. At the end of 2005, the company failed to accrue sales salaries of P90,000.
c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was determined
that the company owed an additional P170,000 in taxes related to 2004. The company
did not record a liability in 2004 or 2005 because the possibility of loss was considered
remote, and charged the P170,000 to a loss account in 2006.
d. Luzon Company purchased another company early in 2004 and recorded goodwill of
P900,000. Luzon had not amortized goodwill because its value had not diminished. The
estimated economic life of the goodwill is 20 years.
e. In 2006, the company wrote off P174,000 of inventory considered to be obsolete; this
loss was charged directly to Retained Earnings.
f.
Year-end wages payable of P6,800 were not recorded because the bookkeeper though
that “they were immaterial.”
g. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of P5,280 because “the amount of the check is about
the same every year.
Questions
1. The entry to record the adjustment of item “a” is:
a. Accumulated depreciation
34,000
Retained earnings
Depreciation expense
b. Accumulated depreciation
51,000
Retained earnings
Depreciation expense
c. Accumulated depreciation
17,000
Depreciation expense
d. Accumulated depreciation
17,000
Retained earnings
2. The entry to record the adjustment of item “c”:
a. No adjustment.
b. Retained earnings
170,000
Estimated liability
c. Loss on damages
170,000
Estimated liability
d. Loss on damages
170,000
Cash
17,000
17,000
34,000
17,000
17,000
17,000
170,000
170,000
170,000
9
3. Net income of 2005 is overstated by:
a. P 460,400
b. P 318,400
c. P 107,000
d. P 73,000
4. Net income of 2006 is overstated by:
a. P 367,000
b. P 312,000
c. P 103,400
d. P 69,400
Solution
a. Accumulated depreciation
51,000
Depreciation expense (2006)
Retained earnings (2004 & 2005)
b. Retained earnings
90,000
Salaries expense
c. No adjustment
d. No adjustment since no indication of impairment.
e. Loss on obsolete inventory
174,000
Retained earnings
f.
Salaries expense
6,800
Salaries payable
g. Prepaid insurance
4,400
Insurance expense
2004
17,000
Item A
Item B
Item C
Item D
Item E
Item F
Item G
Net Effect
Answer:
1. B
-
___________
17,000
2. A
3. D
17,000
34,000
90,000
174,000
6,800
4,400
2005
17,000
(90,000)
-
2006
17,000
90,000
-
__________
(73,000
(174,000)
(6,800)
4,400
(69,400)
4. D
Problem 2
A CPA is engaged by the Sony Corporation in 2006 to examine the books and records and to
make whatever corrections are necessary. An examination of the accounts discloses the
following:
a. Dividends had been declared on December 15 in 2004 and 2005 but had not been
entered in the books until paid.
b. Improvements in building and equipment of P9,600 had been debited to expense at the
end of April 2003. Improvements are estimated to have an 8-year life. The company
uses the straight-line method in recording depreciation and computes depreciation to
the nearest month.
c. The physical inventory of merchandise had been understated by P3,000 at the end of
2004 and by P4,300 at the end of 2005.
d. The merchandise inventories at the end of 2005 and 2006 did not include merchandise
that was then in transit and to which the company had title. This shipments of P3,800
and P5,500 were recorded as purchases in January of 2006 and 2004, respectively.
e. The company had failed to record sales commissions payable of P2,100 and P1,700 at
the end of 2005 and 2006, respectively.
10
f.
The company had failed to recognized supplies on hand of P1,200 and P2,500 at the end
of 2005 and 2006, respectively.
The Retained Earnings account showed the following postings:
2004
2005
2006
Date
Jan 1
Dec 31
Jan 10
Mar 6
Dec31
Jan 10
Dec 31
Item
Balance
Net income for year
Dividends paid
Stock sold – excess
over par
Net loss for year
Dividend paid
Net loss for year
Debit
Credit
81,000
18,000
15,000
32,000
11,200
15,000
12,400
Questions:
1. Corrected net income of 2004
a. P 19,800
b. P 15,600
c. P 13,600
d. P 16,800
2. Corrected net loss of 2005
a. P 16,000
b. P 14,000
c. P 12,000
d. P 10,000
3. Corrected net loss of 2006
a. P 16,200
b. P 15,800
c. P 15,200
d. P 12,800
4. Adjusted retained earnings at December 31, 2004
a. P 109,200
b. P 106,400
c. P 94,600
d. P 85,000
5. Adjusted retained earnings at December 31, 2005
a. P 71,200
b. P 69,000
c. P 67,600
d. P 65,000
6. Adjusted retained earnings at December 31, 2006
a. P 51,400
b. P 49,800
c. P 49,000
d. P 48,200
Solution
Unadjusted Net income/Loss
Item B
Item C
2004
18,000
(1,200)
3,000
Item D – unrecorded ending inv.
- unrecorded purchases
(3,800)
Item E
Item F
Adjusted net income/loss
Retained earnings – beg.
Item A
Item B – error in recording improv.
- unrecorded depreciation
Retained earnings - end
Answer:
1. A
2. C
3. A
2005
(11,200)
(1,200)
(3,000)
4,300
3,800
(2,100)
___________
19,800
81,000
(15,000)
9,600
(800)
94,600
4. C
1,200
__________
(12,000)
94,600
(15,000)
_________
67,600
5. C
2006
(12,400)
(1,200)
(4,300)
(3,800)
5,500
3,800
(5,500)
2,100
(1,700)
(1,200)
2,500
(16,200)
67,600
____________
51,400
6. A
11
Problem 3
A partial trial balance of Josh Alejandro Corporation is as follows on December 31, 2006:
Dr.____
____Cr.____
Supplies on hand
P 13,500
Accrued salaries and wages
P 7,500
Interest receivable on investments
25,500
Prepaid insurance
450,000
Unearned rent
-0Accrued interest payable
75,000
Additional adjusting data:
a. A physical count of supplies on hand on December 31, 2006, totaled P5,500.
b. Through oversight, the Accrued Salaries and Wages account was not changed during
2006. Accrued salaries and wages on 12/31/06 amounted to P22,000.
c. The interest receivable on investments account was also left unchanged during 2006.
Accrued interest on investments amounts to P21,750 on 12/31/06.
d. The unexpired portions of the insurance policies totaled P325,000 as of December 31,
2006.
e. P140,000 was received on January 1, 2005, for the rent of a building for both 2005 and
2006. The entire amount was credited to rental income.
f.
Depreciation for the year was erroneously recorded as P25,000 rather than the
figure of P250,000.
correct
g. A further review of depreciation calculations of prior year revealed that depreciation of
P36,000 was not recorded. It was decided that this oversight should be corrected by a
prior period adjustment.
Questions
1. The accrued salaries and wages at year-end is:
a. P 29,500
b. P22,000
c. P 14,500
d. P 7,500
2. How much is the adjusted salaries and wages at year-end assuming that the balance of
this account in the book is P350,000?
a. P 379,500
b. P 372,000
c. P 364,500
d. P 342,500
3. Prepaid insurance at year-end is:
a. P 450,000
b. P 325,000
4. Supplies on hand at year-end is:
a. P 13,500
b. P 8,000
5. Depreciation expense at year-end is:
a. Understated by P225,000
b. Overstated by P225,000
c. Understated by P261,000
d. Overstated by P261,000
12
c. P 125,000
d. P 0
c. P 5,500
d. P 2,500
Solution
1. Supplies expense
Supplies on hand
2. Accrued salaries and wages
Salaries and wages expense
To reverse accrued salaries.
Salaries and wages expense
Accrued salaries and wages
3. Interest income
Interest receivable
To reverse accrued income.
Interest receivable
Interest income
4. Insurance expense
Prepaid insurance
5. Retained earnings
Rent income
6. Depreciation expense
Accumulated depreciation
7. Retained earnings
Accumulated depreciation
Answer:
1. B
2. C
3. B
8,000
8,000
7,500
7,500
22,000
22,000
25,500
25,500
21,750
21,750
125,000
125,000
70,000
70,000
225,000
225,000
36,000
36,000
4. C
5. A
Problem 4
The before tax income for Franzine Gomez Co. for 2005 was P303,000 and P232,200 for
2006. However, the accountant noted that the following errors had been made:
1. Sales for 2005 included amounts of P114,600 which was received in cash during 2005,
but for which the related products were delivered in 2006. Title did not pass to the
purchaser until 2006.
2. The inventory on December 31, 2005, was understated by P25,920.
3. The bookkeeper in recording interest expense for both 2005 and 2006 on bonds payable
made the following entry:
Interest expense
Cash
15,000
15,000
The bonds have a face value of P250,000 and pay a stated interest rate of 6%. They
were issued at a discount of P15,000 on January 1, 2005, to yield an effective interest of
7%. (Assume that the effective yield method should be used.)
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2005 and 2006 for P25,500 and P30,000, respectively. The company applies a
rate of 10% to the balance in the equipment account at the end of the year in its
determination of depreciation charges.
Questions
1. The adjusted 2005 net income is:
a. P 422,120
b. P 419,120
c. P 192,920
d. P 189,920
2. The adjusted 2006 net income is:
a. P 294,878
b. P 291,878
c. P 180,278
d. P 65,678
13
3. 2005 net income is overstated by:
a. P 232,200
b. P 229,200
c. P 113,080
4. 2006 net income is:
a. Understated by P62,678
b. Understated by P59,678
c. Overstated by P166,522
d. Overstated by P51,922
5. The correcting entry in item “1” is:
a. Accounts receivable
Sales
b. Sales
Accounts receivable
c. Retained earnings
Sales
d. Sales
Retained earnings
Solution
1. Retained earnings
Sales
2. Cost of sales (beg. inv)
Retained earnings
3. Retained earnings
Interest expense
Discount on bonds payable
Int. paid
2002
2003
4.
114,600
114,600
114,600
114,600
114,600
114,600
25,920
25,920
1,450
1,552
Int. exp.
15,000
15,000
3,002
Carrying
Value
235,000
1,450
236,450
1,552
238,002
Amort.
16,450
16,552
25,500
30,000
55,500
5,100
2,550
2,550
3,000
Unadjusted net income
Item 1
Item 2
Item 3
Item 4
- error in recording depreciation
14
114,600
114,600
114,600
Retained earnings
Repairs expense
Equipment
Accumulated depreciation
Retained earnings
Depreciation expense
Accumulated depreciation
Depreciation expense
Adjusted net income
Answer:
1. D
2. A
114,600
3. C
3,000
2002
303,000
(114,600)
25,920
(1,450)
(25,500)
2,550
__________
189,920
4. A
2003
232,200
114,600
(25,920)
(1,552)
(30,000
2,550
3,000
294,878
5. C
d. P
3,000
Problem 5
You have been assigned to examine the financial statements of Macelle Company for the
year ended December 31, 2006. Below is the Balance Sheet of the company.
Current assets
Non-current assets
Total Assets
700,000
2,000,000
_________
2,700,000
Current liabilities
Non-current liabilities
Stockholders’ Equity
Total liabilities/SHE
250,000
900,000
1,550,000
2,700,000
In the course of your audit, you discover the following situations:
1. Depreciation of P16,000 for 2006 on delivery vehicles was not recorded.
2. The physical inventory count on December 31, 2005, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Macelle uses
periodic inventory system.
3. The physical inventory count on December 31, 2006, improperly included merchandise
with a cost of P42,500 that had been recorded as a sale on December 27, 2006.
4. A collection of P28,000 on account from a customer received on
was not recorded until January 2, 2007.
December 31, 2006
5. In 2006, the company sold for P18,500 fully depreciated equipment that originally cost
P110,000. The company credited the proceeds from the sale to the Equipment account.
6. During November 2006, a competitor company filed a patent-infringement suit against
Macelle claiming damages of P1,100,000. The company’s legal counsel has indicated
that an unfavorable verdict is probable and a reasonable estimate of the court’s award
to the competitor is P625,000. The company has not reflected or disclosed this situation
in the financial statements.
7. Macelle has a portfolio of trading securities. No entry has been made to adjust to
market. Information on cost and market value is as follows:
December 31, 2005
December 31, 2006
COST
P 190,000
168,000
MARKET
P 190,000
164,000
8. At December 31, 2006, an analysis of payroll information shows accrued salaries of
P36,600. The Accrued Salaries payable account had a balance of P48,000 at December
31, 2006, which was unchanged from its balance at December 31, 2005.
9. A large piece of equipment was purchased on January 3, 2006, for P1,600,000 and was
charged to Repairs Expense. The equipment is estimated to have a service life of 8 years
and no residual value. Macelle normally uses the straight – line depreciation method for
this type of equipment.
10. A P75,000 insurance premium paid on July 1, 2005, for a policy that expires on June 30,
2009, was charged to insurance expense.
11. A trademark was acquired at the beginning of 2005 for P250,000. No amortization has
been recorded since its acquisition. Trademark has an economic life of 5 years.
15
Questions
1. Current assets at year-end is:
a. P 776,000
b. P 695,000
c. P 691,000
d. P 678,500
2. Non-current assets at year-end is:
a. P 3,498,500
b. P 3,402,500
c. P 3,302,500
d. P 3,298,500
3. Current liabilities at year-end is:
a. P 911,600
b. P 863,600
c. P 286,600
d. P 238,600
4. Non-current liabilities at year-end is:
a. P 1,561,600
b. P 1,525,000
c. P 1,513,600
d. P 900,000
5. The net income of 2006 is understated by:
a. P 622,400
b. P 603,900
c. P 568,400
d. P 559,900
6. The total amount of fundamental error is:
a. P 176,000
b. P 157,500
c. P 107,500
d. P 25,000
7. Total Stockholders’ Equity at year-end is:
a. P 2,329,900
b. P 2,229,900
c. P 2,227,400
d. P 2,099,400
8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment
b. Retained earnings
42,500
Cost of sales
42,500
c. Cost of sales
42,500
Retained earnings
42,500
d. Retained Earnings
42,500
Inventory
42,500
Solution
1. Depreciation expense
16,000
Accumulated depreciation
2. Cost of sales (beg. inv)
95,000
Retained earnings
3. Cost of sales
42,500
Inventory
4. Cash
28,000
Accounts receivable
5. Accumulated depreciation
110,000
Machinery
Gain on sale
6. Loss on damages
625,000
Estimated liability on damages
7. Unrealized holding loss
26,000
Valuation allowance
Market value – beg.
190,000
Market value – end
164,000
Unrealized holding loss
26,000
8. Salaries payable
48,000
Salaries expense
To reverse accrued salaries.
Salaries expense
36,600
Salaries payable
9. Equipment
1,600,000
Repairs expense
Depreciation expense
200,000
Accumulated depreciation
16
16,000
95,000
42,500
28,000
91,500
18,500
625,000
26,000
48,000
36,600
1,600,000
200,000
10. Insurance expense
25,000
Prepaid insurance
37,500
Retained earnings
11. No amortization since no information about its impairment.
Answer:
1. C
2. B
3. B
4. D
5. B
6. A
7. A
62,500
8. D
Problem 6
Matias Corporation requires audited financial statements for credit purposes. After making
normal adjusting entries, but before closing the accounting records for the year ended
December 31, 2006. Matias’s controller prepared the following financial statements for
2006:
Matias Corporation
STATEMENT OF FINANCIAL POSITION
December 31, 2006
Assets
Cash
1,225,000
Marketable equity securities
125,000
Accounts Receivable
460,000
Allowance for doubtful accounts
( 55,000)
Inventories
530,000
Property and equipment
620,000
Accumulated Depreciation
( 280,000)
Total Assets
2,625,000
Liabilities and Stockholders’ Equity
Accounts payable and accrued liabilities
Income tax payable
Common stock, P20 par
Additional paid-in capital
Retained earnings
Total liabilities and stockholders’ equity
1,685,000
110,000
300,000
75,000
455,000
2,625,000
Matias Corporation
STATEMENT OF INCOME
For the Year Ended December 31, 2006
Net Sales
1,700,000
Cost of sales
570,000
Gross Profit
1,130,000
Operating Expenses
Selling and administrative
448,000
Depreciation
42,000
Income before income tax
640,000
Income tax expense
192,000
Net Income
448,000
Matias’s tax rate for all items was 30% for all affected years, and it made estimated tax
payments when due. Matias has been profitable in the past and expects results in the future
to be similar to 2006. During the course of the audit, the following additional information
(not considered when the above statements were prepared) was obtained:
1. The investment portfolio consists of short-term investment, classified as available-forsale, for which total market value equaled cost at December 31, 2005. On February 2,
17
2006, Matias sold one investment with a carrying value of P100,000 for P130,000. The
total of the sale proceeds was credited to the investment account.
2. At December 31, 2006, the market value of the remaining securities in the portfolio was
P142,000.
3. The P530,000 inventory total, which was based on a physical count at December 31,
2006, was priced at cost. Subsequently, it was determined that the inventory cost was
overstated by P66,000.
At December 31, 2006, the inventory’s market value
approximated the adjusted cost.
4. Pollution control devices costing P48,000, which is high in relation to the cost of the
original equipment, were installed on December 29, 2005, and were charged to repairs in
2005.
5. The original equipment referred to in Item 4, which had a remaining useful life of six
years on December 20, 2005, is being depreciated by the straight-line method for both
financial and tax reporting.
6. A lawsuit was filed against Matias Corporation in October 2006 claiming damages of
P250,000. Company’s legal counsel believes that an unfavorable outcome is probable,
and a reasonable estimate of the court’s award to the plaintiff is P60,000, which will be
paid in 2007 if the case is settled.
Questions
1. Marketable Equity Securities at year-end is:
a. P 155,000
b. P 125,000
c. P 95,000
d. P 82,000
2. Allowance for market decline in value of marketable equity security at year-end is:
a. P 0
b. P 8,000
c. P 10,000
d. P 13,000
3. Inventory at year-end is:
a. P 464,000
b. P 512,000
c. P 530,000
d. P 596,000
4. Cost of sales at year-end is:
a. P 636,000
b. P 570,000
c. P 550,000
d. P 504,000
5. Net income of the company is:
a. P 399,700
b. P 379,000
c. P 366,100
d. P 331,000
Solution
1. Marketable equity securities
Gain on sale
2. Loss on market decline
Allowance for market decline
3. Cost of sales
Inventory
4. Equipment
Retained earnings
5. Depreciation
Accumulated depreciation
6. Loss on damages
Estimated liability on damages
Answer:
1. A
2. D
3. A
18
30,000
30,000
13,000
13,000
66,000
66,000
48,000
48,000
8,000
8,000
60,000
60,000
4. A
5. C
Problem 7
Long established a retail business in 2004. Early in 2007, Long entered into negotiations
with Short with the intent to form a partnership. You have been asked by Long and Short
to check Long’s books for the past three years to help Short evaluate the earnings potential
of the business.
The net incomes reported on statements submitted to you were as follows:
Income, pretax
Year ending 12/31
2005
P 70,763
2004
P63,000
2006
P 61,880
During the examination of the accounts, you found the data given below:
2004
For year ended Dec. 31
2005
2006
Omission from the books
a. Accrued expenses at end of year
b. Earned (uncollected) revenue at end
of year
c. Prepaid expenses at end of year
d. Unearned revenue (collected in advance)
at end of year
P 15,120
P 14,658
P 32,368
1,400
6,314
8,470
9,842
4,270
Goods in transit at end of year omitted from
inventory
e. Purchase for which the entry had been made
(ownership passed)
f. Purchase for which the entry had not been made
(ownership not passed)
18,270
21,640
11,970
13,710
Other points requiring considerations:
g. On January 1, 2006, sold operational equipment for P31,500 that originally cost P35,000
on January 1, 2004. Cash was debited for P31,500 and equipment was credited for
P31,500. The asset sold was depreciated in 2004 and 2005 but not on the 2006 on the
basis of a 10-year life and no residual value.
h. No allowance for bad debts has been set up. An analysis of accounts receivable as of
December 31, 2006, indicates that the allowance account should have a balance of
P14,000, of which P3,500 relates to 2004, P4,900 to 2005, and P5,600 to 2006.
Questions
1. Adjusted net income of 2004 is:
a. P 85,834
b. P 82,334
c. P 52,094
d. P 39,466
2. Adjusted net income of 2005 is:
a. P 81,669
b. P 81,081
c. P 80,157
d. P 76,769
3. Adjusted net income of 2006 is:
a. P 86,502
b. P 56,682
c. P 51,082
d. P 42,682
19
4. Inventory at year-end is understated by:
a. P 3,370
b. P 7,930
c. P 21,640
5. Accrued expenses at year-end is:
a. Overstated by P17,710
b. Understated by P32,368
c. Understated by P31,908
d. Understated by P17,710
d. P 35,350
Solution
Unadjusted net income
Item A
2004
63,000
(15,120)
2005
70,763
15,120
(14,658)
1,400
6,314
(1,400)
(6,314)
8,470
Item B
Item C
Item D
Item E
Item F
Item G
Item H
Adjusted net income
Answer:
1. C
2. B
(4,270)
18,270
-
-
(3,500)
52,094
(4,900)
81,081
3. C
4. C
2006
61,880
14,658
(32,368)
(8,470)
9,842
4,270
(18,270)
21,640
3,500
(5,600)
51,082
5. B
Problem 8
VILLA LYDIA CO. The records of the Company have not been examined for the three-year
period ended December 31, 2006. As a result of your audit of the records for the year
ended December 31, 2006 and your review of the records of the two prior years, it is
necessary to revise the net income and the retained income based upon the audited data,
which follows:
The company’s retained income at December 31, 2006 follows:
Balance, 12/31/04
Net income, 2005
Net income, 2006
Balance, 12/31/06
P 90,000
100,000
110,000
P300,000
From your examination, you obtained the following information which must be taken into
consideration at the close of the year involved:
December 31, 2004
1. Goods consigned out to consignees are included in the inventory at P120,000, which is
20 percent in excess of cost.
2. Equipment with a 10-year-life was purchased for P30,000 and charged to expense on
December 31.
3. The following liabilities are omitted from the records:
Materials included in inventory
P 3,000
Accrued taxes
4,100
20
December 31, 2005
4. Uncollectible accounts receivable of P9,000 are to be written off.
5. Marketable Securities costing P15,000 were at a market value of only P9,000.
6. Gain of P3,000 on sale of fully depreciated equipment was credited to the allowance for
depreciation.
7. Land cost of P9,000 had been erroneously charged to expense.
8. The inventory is overstated by P14,300 because of an error in footing an inventory
price sheet.
9. Depreciation was omitted; P5,000 should be provided.
December 31, 2006
10. The following liabilities are omitted from the records:
For purchases of new machinery on December 31, 2006
Accrued taxes
P12,000
5,900
Questions
1. Adjusted net income of 2005 is:
a. P 119,400
b. P 110,800
c. P 102,600
d. P 90,800
2. Adjusted net income of 2006 is:
a. P 89,800
b. P 98,600
c. P 115,400
d. P 145,400
3. Adjusted retained earnings of 2004 is:
a. P 112,900
b. P 109,900
c. P 92,900
d. P 89,900
4. Adjusted retained earnings of 2005 is:
a. P 180,700
b. P 203,700
c. P 212,500
d. P 212,300
5. Adjusted retained earnings of 2006 is:
a. P 416,200
b. P 416,000
c. P 319,100
d. P 296,100
6
The entry to correct information “number 3” at December 31, 2006 is:
a. Retained earnings
4,100
Accrued taxes
4,100
b. Cost of sales
3,000
Accounts payable
3,000
c. Retained earnings
4,100
Cost of sales
3,000
Accrued taxes
4,100
Accounts payable
3,000
d. No adjusting entry is necessary.
9. The entry to correct information “number 4” at December 31, 2006 is:
a. Allowance for bad debts
9,000
Accounts receivable
9,000
b. Retained earnings
9,000
Accounts receivable
9,000
c. Retained earnings
9,000
Allowance for bad debts
9,000
d. No adjusting entry is necessary
21
8. Adjusted net income of 2004 (assuming P85,000 is recorded as net income of 2004) is:
a. P 116,900
b. P 115,000
c. P 107,900
d. P 87,900
Solution
1. No adjustment since the 2004 financial statement was not affected.
2. Equipment
30,000
Retained earnings
30,000
Retained earnings
3,000
Depreciation expense
3,000
Accumulated depreciation
6,000
3. No adjustment since the 2004 financial statement was not affected.
4. Allowance for bad debts
9,000
Accounts receivable
9,000
5. Retained earnings
6,000
Allowance for market decline
6,000
6. Accumulated depreciation
3,000
Retained earnings
3,000
7. Land
9,000
Retained earnings
9,000
8. Retained earnings
14,300
Cost of sales
14,300
9. Retained earnings
5,000
Accumulated depreciation
5,000
10. Machinery
12,000
Accounts payable – others
12,000
Taxes
5,900
Accrued taxes
5,900
Unadjusted net income
Item 1
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 8
Item 9
Item 10
Adjusted net income
Retained earnings - beg
Adjustments:
Item 1
Item 2
Item 3
Retained earnings - end
Answer:
1. B
2. C
3. C
4. B
2004
(20,000)
30,000
(3,000)
(4,100)
-
_________
2005
100,000
20,000
(3,000)
3,000
4,100
(6,000)
3,000
9,000
(14,300)
(5,000)
_________
110,800
90,000
(20,000)
30,000
(3,000)
(4,100)
203,700
5. C
6. D
7. A
2006
110,000
(3,000)
-
14,300
(5,900)
115,400
203,700
_________
319,100
8. D
Problem 9
The Corporation prepared its own income statement for the years 2005 and 2006. The
President was not satisfied and decided to engage the services of a CPA. The following
errors were discovered by the CPA:
___2005__ ___2006___
Net income after income tax
P 123,250 P 156,250
Inventory understatement at year-end
P
P 12,500
Prepaid expenses not taken up
5,000
15,000
Merchandise purchased on account not
Recorded as liability but included in
22
inventory
Unearned rent received taken into income
Accrued taxes unrecorded
25,000
20,000
9,000
15,000
Questions
1. Net income of 2005 is:
a. P 163,250
b. P 108,250 c. P 83,250
d. P 73,250
2. Net income of 2006 is:
a. P 199,750
b. P 174,750 c. P 144,750
d. P 142,250
Solution
Unadjusted net income
2005
123,250
5,000
(25,000)
Adjusted net income
Answer:
1. C
2. A
(20,000)
__________
83,250
2006
156,250
12,500
(5,000)
15,000
25,000
(9,000)
20,000
(15,000)
199,750
Problem 1O
Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash
basis during the year
Wizard is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2006 financial statements prepared on the accrual basis of
accounting from Wizard. As Wizard’s external auditor, you were called upon to assist in
preparing the financial statements. The following information were obtained during the
course of your engagement:
Wizard Company
TRIAL BALANCE
December 31, 2006
Debits
Credits
Cash
P448,000
Accounts receivable, 12/31/05
283,500
Inventory, 12/31/05
1,085,000
Furniture & Fixtures
2,068,500
Leasehold improvements
787,500
Accumulated depreciation, 12/31/05
P
567,000
Accounts payable
297,500
Wizard, Drawings
Wizard, Capital, 12/31/05
2,180,500
Sales
11,427,500
Purchases
5,339,250
Salaries expense
3,045,000
Taxes and licenses
217,000
Insurance expense
152,250
Rent expense
598,500
Utilities expense
220,500
Living expenses
227,500
_________
P 14,472,500
P 14,472,500
23
Additional information:
1. At December 31, 2006, amounts due from customers totaled P415,000.
2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.
3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31,
2006 and December 31, 2005 respectively.
4. The inventory totaled P1,274,000 based on a physical count of the goods at December
31, 2006. The inventory was priced at cost, which approximates market value.
5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage
for one year. The premium on the previous policy, which expired on April 30, 2006, was
P136,500.
6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant
lot adjacent Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard
paved and fenced in the lot at a cost of P787,500. The improvements were completed on
April 1, 2006, and estimated to have a useful life of fifteen years. No provision for
depreciation has been recorded. Depreciation on furniture and fixtures was P210,000 for
2006.
7. Accrued expenses at December 31, 2006 and 2005 were as follows:
2006
2005
Taxes and licenses
P33,750
P20,250
Utilities
36,000
24,750
P69,750
P45,000
8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome
is probable and that a reasonable estimate of the settlement is P3,000,000.
9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also
receives P4,375 per week for living expenses.
Questions
Determine the balances of the following under the accrual basis of accounting.
1. Accounts Receivable
a. 415,000
b. P 283,500
c. P 131,500
d. P 152,000
2. Accounts Receivable, net
a. P 408,425
b. P 404,625
c. P 394,250
d. P 262,500
3. Inventory
a. P 1,274,000
b. P 1,085,000
c. P 189,000
d. P 896,000
4. Prepaid Insurance
a. P 147,000
b. P
c. P 50,750
d. P0
c. P 2,039,625
d. P 1,858,500
96,250
5. Property and equipment, net
a. P 2,856,000
b. P 2,616,469
24
6. Accounts payable
a. P 533,750
b. P 523,750
c. P 297,500
d.P 236,250
7. Accrued Expenses
a. P 114,750
b. P
c. P 24,750
d. P0
8. Wizard, Drawings
a. P 707,500
b. P 480,000
c.
d. P0
69,750
P 227,500
9. Wizard, Capital, 12/31/05
a. P 2,226,000
b. P 2,181,000
c. P 2,180,500
d. P 2,135,500
10. Sales
a. P 11,842,500
b.
c. P 11,427,500
d. P 11,296,000
11. Purchases
a. P 5,873,000
b. P 5,575,500
c. P 5,339,250
d. P 5,103,000
12. Salaries Expense
a. P 3,272,500
b. P 3,045,000
c. P 2,655,000
d. P 2,565,000
13. Taxes and licenses
a. P 250,750
b. P 230,500
c. P 217,000
d. P 203,500
14. Insurance expense
a. P 197,750
b. P 147,000
c. P 152,250
d. P 101,500
15. Utilities expense
a. P 256,500
b. P 231,750
c. P 220,500
d. P 195,750
16. Doubtful account expense
a. P 20,750
b. P 10,375
c. P 6,575
d. P 0
17. Depreciation expense
a. P 294,375
b. P 249,375
c. P 239,531
d. P 210,000
18. Cost of sales
a. P 5,386,500
b. P 5,368,500
c. P 5,150,250
d. P 4,065,000
c. P 500,000
d. P0
P 11,559,000
19. Estimated loss from lawsuit
a. P 4,000,000
b. P 3,000,000
Solution
1. A
- P415,000 given in item no. 1
2. C
- P394,250 (P415,000 – P20,750 item no. 2)
3. A
- P1,274,000 given in item no. 4
4. C
- P152,250 x 4/12 = P50,750
5. C
Furniture & fixtures
2,068,500
Leasehold improvements
787,500
Less: Accumulated dep’n – 1/1/02
( 567,000)
2002 Depreciation – improve.
( 39,375)
2002 Dep’n – furniture
( 210,000)
Carrying value – 2002
2,039,625
6. A
- P533,750 given in item no. 3
7. B
- P69,750 given in item no. 7
25
8.
A
9.
B
10. B
11. B
12. D
13. B
14. B
15. B
16.
17.
18.
19.
Salaries – P40,000 x 12
Living allowance P4,375 x 52 weeks
Total
- P 480,000
- 227,500
707,500
Capital – beg.
Omission of prepaid expense in 2001
Omission of accrued expenses in 2001
Total
2,180,500
45,500
( 45,000)
2,181,000
Sales – cash basis
+ AR – end
- AR – beg
Sales – accrual basis
- 11,427,500
415,000
283,500
- 11,559,000
Purchases – cash basis
+ AP – end
- AP – beg
Purchases – accrual basis
- 5,339,250
533,750
297,500
- 5,575,500
Salaries per record
- 3,045,000
- Salaries of the proprietor *
480,000
Adjusted Salaries
- 2,565,000
* Salaries of the proprietor for a partnership is considered as part of profit distribution
Taxes and
+ Accrued
- Accrued
Taxes and
licenses – cash basis
taxes – end
taxes – beg
licenses – accrual basis
- 217,000
- 33,750
- 20,250
- 230,500
Insurance expense – cash basis
+ Prepaid insurance – beg
- Prepaid insurance – end
Insurance expense – accrual basis
- 152,250
- 45,500
- 50,750
- 147,000
Utilities – cash basis
+ Accrued utilities – end
- Accrued utilities – beg
Utilities – accrual basis
A – given in item # 2
B – refer to Question # 5 question
A
Beginning inventory
Purchases
Ending inventory
Cost of Sales
C
Since there is a comprehensive insurance policy
2.5M)
- 220,500
- 36,000
- 24,750
- 231,750
-
1,085,000
5,575,500
(1,274,000)
5,386,500
for the damage, only P500,000 will be charged as loss (3M –
Problem 11
You have been engaged to examine the financial statements of Vince Corporation for the
year ended December 31, 2006. In the course of your examination, you have ascertained
the following information:
1. Vince uses the allowance method of accounting for uncollectible trade accounts
receivable. The allowance is based upon 3% of past due accounts (over 120 days) and
1% of current accounts as of the close of each month. Due to the changing economic
conditions and climate, the amount of past due accounts has increased significantly, and
management has decided to increase the percentage based on past due accounts to 5%.
The following balances are available:
26
Accounts Receivable
Past due accounts (included
in Accounts Receivable)
Allowance for uncollectible accounts
As of
Nov. 30, 2006
As of
Dec. 31, 2006
Debit
Debit
Credit
Credit
P 390,000
-
P 430,000
-
12,000
-
30,000
-
-
P 28,000
9,000
-
2. The merchandise inventory on December 31, 2005 did not include merchandise having a
cost of P7,000.00 which was stored in a public warehouse. Merchandise having a cost of
P3,000.00 was erroneously counted twice and included twice in the merchandise
inventory on December 31, 2006. Vince uses a periodic inventory system.
3. On January 2, 2006, Vince had a new machine delivered and installed in its new factory.
The cost of this machine was P97,000.00 and the machine is being depreciated on a
straight-line method over an estimated useful life of 10 years. When the new machine
was installed, Vince paid for the following items which were not included in the cost of
the machine, but were charged to repairs and maintenance:
Delivery Expense
P 2,500.00
Installation Costs
8,000.00
Rearrangement of related Equipment
4,000.00
P14,500.00
4. On May 3, 2006, Vince exchanged 500 shares of treasury stock (P50.00 par value
common stock) for a parcel of land to be used as a site for a new factory. The treasury
stock had a cost P70.00 per share when it was acquired and on May 03, 2006, it had a
fair value of P80.00 per share. Vince received P2,000.00 when an existing building on
the land was sold for scrap. The land was capitalized at P40,0000.00 and Vince recorded
a gain of P5,000.00 on the sale of its treasury stock.
You found the following journal entries
Land . . . . . . . . . . . . . .
Treasury stock . . . . . . . .
Gain on Sale of treasury stock
in the books:
.
P 40,000.00
. . . . . .
P 35,000.00
. . . . .
5,000.00
Cash . . . . . . . . . . . . . . .
Miscellaneous Income . . . . . . . . . .
P
2,000.00
P 2,000.00
5. On January 02, 2006, Vince Corporation established a noncontributory defined benefit
plan covering all employees and contributed P 1,000,000.00 to the plan and charged this
amount to the “pension expense”. At December 31, 2006, Vince determined that the
2006 current service and interest costs on the plan amount to P 620,000,00. The
expected and actual rate of return on plan assets for 2006 was 10%.
Questions
1. The allowance for uncollectible accounts to be reported on the Balance Sheet is:
a. P 14,500.00
b. P 9,000.00
c. P 5,500.00
d. P 4,000.00
2. Doubtful account expense at December 31, 2006 is:
a. P 14,500.00
b. P 9,000.00
c. P 5,500.00
d. P 4,000.00
27
3. 2006 merchandise inventory is:
a. Understated by P 10,000.00
b. Understated by P 4,000.00
c. Overstated by P 3,000.00
d. Overstated by P 4,000.00
4. If no proper correcting entries were made at December 31, 2005, by how much will
2005 net income before income taxes be overstated or understated?
a. Understated by P7,000.00
c. Overstated by P 7,000.00
b. Understated by P4,000.00
d. Overstated by P 4,000.00
5. Machinery and equipment account should be reported in the balance sheet (net of
accumulated depreciation) at December 31, 2006:
a. P 100,350.00
b. P 110,050.00
c. P 111,500.00
d. P 101,800.00
6. Land account should be reported in the balance sheet at December 31, 2006:
a. P 35,000.00
b. P 33,000.00
c. P 40,000.00
d. P 38,000.00
7. What should be reported at December 31, 2006 as prepaid pension cost?
a. P 620,000.00
b. P 520,000.00
c. P 1,000,000.00 d. P 480,000.00
8. What amount should be reported as pension expense in 2006?
a. P 620,000.00
b. P 520,000.00
c. P 1,000,000.00
d. P 480,000.00
9. How much gain should be reported on item no. 4?
a. P 5,000.00
b. P 15,000.00
c. P 10,000.00
d. P 0
10. If no proper correcting entries were made at December 31, 2006, by how much will
2006 net income before income taxes be overstated or understated?
a. Understated by P 493,450.00
c. Overstated by P 539,050.00
b. Understated by P 534,050.00
d. Overstated by P 498,450.00
Solution
(1)
Doubtful Account Expense
14,500.00
Allowance for D/A
14,500.00
Required allowance as of 12.31.2006
-on past due accounts (5% x P30,000.00)
P 1,500.00
-on current accounts (1% x P400,000.00)
4,000.00
Total
P 5,500.00
Unadjusted “debit” balance of Allowance for D/A
9,000.00
Additional Provision (expense)
P14,500.00
(2)
a. Merchandise Inventory, 01.01.2006
7,000.00
Retained Earnings
7,000.00
(to correct understatement of inventory at end of 2005)
b. Cost of Sales
3,000.00
Merchandise Inventory, 12.31.2006
3,000.00
(to correct overstatement ending inventory for 2006)
(3)
a. Machinery
14,500.00
Repairs and Maintenance
14,500.00
(to reclassify delivery and installation costs)
b. Depreciation Expense
1,450.00
Accumulated Depreciation
1,450.00
(to provide for depreciation for items not capitalized)
(4)
Miscellaneous Income
2,000.00
Gain on Sale of Treasury Stock
5,000.00
Land
2,000.00
APIC-T/S
5,000.00
(to correct client’s entry on the purchase of land)
(5)
Prepaid Pension Cost
480,000.00
Pension Expense
480,000.00
(to correct client’s entry in the treatment of prepaid pension cost)
28
Answer:
1. C
2. A
Current Service and interest cost
Expected return on Plan Asset
(P 1,000,000.00 x 10%)
Pension Expense
Reported pension expense
Prepaid Pension Cost
3. C
4. A
5. A
6. D
P
P
7. D
620,000.00
( 100,000.00)_
520,000.00
1,000,000.00
P 480,000.00
8. B
9. D
10. D
Problem 12
Ron-Ron Storage underwent a restructuring in 2006. The company conducted a thorough
internal audit, during which the following facts were discovered. The audit occurred during
2006 before any adjusting entries or closing entries are prepared.
a. Additional printers were acquired at the beginning of 2004 and added to the company’s
office network.
The P9,000 cost of the printers was inadvertently recorded as
maintenance expense. The printers have five-year useful lives and no material salvage
value. This class of equipment is depreciated by the straight-line method.
b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and
recorded the expenditure as office supplies on hand. The error was discovered a week
later.
c. On December 31, 2005, inventory was understated by P112,000 due to a mistake in the
physical inventory count. The company uses the periodic inventory system.
d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares,
P1) as follows:
Retained earnings
Common stock
4,000
4,000
The shares had a market price at the time of P10 per share.
e. At the end of 2005, the company failed to accrue interest expense that accrued during
the last four months of 2005 on bonds payable. The bonds which were issued at face
value mature in 2010. The following entry was recorded on March 1, 2006, when the
semi-annual interest was paid:
Interest expense
Cash
f.
180,000
180,000
A three-year liability insurance policy was purchased at the beginning of 2005 for
P216,000. The full premium was debited to insurance expense at the time.
Questions
1. Net income of 2004 is:
a. Overstated by P9,000
b. Understated by P9,000
c. Overstated by P7,200
d. Understated by P7,200
2. Net income of 2005 is
a. Understated by P374,200
b. Understated by P134,200
c. Understated by P89,800
d. Overstated by P81,800
29
3. Net income of 2006 is
a. Overstated by P65,800
b. Overstated by P185,800
c. Overstated by P305,800
d. Understated by P38,200
4. Accrued interest on Bonds Payable is
a. P 60,000
b. P 80,000
c. P 120,000
Solution
2004
9,000
(1,800)
A
B
C
D
E
F
Under/(Over)
Answer:
1. D
2. B
3. B
_________
7,200
2005
d. P 180,000
2006
(1,800)
(1,800)
112,000
(112,000)
(120,000)
120,000
(120,000)
(72,000)
185,800
144,000
134,200
4. C
Problem 13
You been asked by a client to review the records of the Claire Joy Company, a small
manufacturer of precision tools and machines. Your client is interested in buying the
business, and arrangements have been made for you to review the accounting records.
Your examination reveals the following:
a. Claire Joy Company commenced business on April 1, 2003, reporting on a fiscal year
ending March 31. The company has never been audited, but the annual statements
prepared by the bookkeeper reflect the following income before closing and before
deducting income taxes:
Year Ended March 31
2004………………………………………
2005………………………………………
2006………………………………………
Income Before Taxes
P 71,600
111,400
103,580
b. A relatively small number of machines have been shipped on consignment. These
transactions have been recorded as an ordinary sale and billed as such. On March 31 of
each year, machines billed and in the hands of consignees amounted for:
2004……………………………………..
P7, 800
2005……………………………………..
none
2006……………………………………..
5, 590
Sales price was determined by adding 30% to cost.
goods were sold the following year.
You learned that the consigned
c. On March 30, 2005, two machines were shipped to a customer on a C.O.D. basis. The
sale was not entered until April 5, 2005 when cash was received for P6,100. The
machines were not included in the inventory at March 31, 2005. (Title passed on March
30, 2005).
d. All machines are sold subject to a five-year warranty. It is estimated that the expense
ultimately to be in connection with the warranty will amount to ½ of 1% of sales. The
company has charged an expense account for warranty costs incurred.
30
Sales per books and warranty costs were:
Year Ended March 31 Sales
2004
P940, 000
2005
1, 010, 000
2006
1, 795, 000
Warranty of Expense for Sales
2004
2005
2006
P760
360
P1, 310
320
1, 620
P1, 910
Made in
Total
P760
1, 670
3, 850
e. The bank deducts 6% on all contracts financed. Of this amount ½% is place in a
reserve to the credit of Claire Joy Company, which is refunded to Claire Joy as finance
contracts are paid in full. The reserve established by the bank has not been reflected in
the books of Claire Joy. The excess of credits over debits (net increase) to the reserve
account with Claire Joy, on the books of the bank for each fiscal year were as follows:
2004………………………………….
P 4, 000
2005………………………………….
4, 000
2006………………………………….
5, 000
P 14, 000
f.
A delivery equipment with a 10-year life (no residual value, straight-line depreciation)
was purchased on April 1, 2005 by issuing a P 600,000 non- interest- bearing, 4 year
note. The entry made to record the purchase was a debit to Delivery Equipment and a
credit to Notes payable for P 600,000; a 10% is a fair rate of interest on the note. The
accountant failed to provide for depreciation for the year on this equipment.
g. For the last three (3) years, the company has failed to accrue salaries and wages. The
correct amounts at the end of each fiscal year were:
2004………………………………….
P 12, 000
2005………………………………….
18, 000
2006………………………………….
10, 000
Questions
Answer the following questions based on the audit findings. Ignore income tax implications.
1. The adjusting entry to set up the estimated Liability under Warranties is
a. Warranty expense
5,411
Retained earnings
7,006
Estimated liability under warranties
12,417
b. Retained earnings
5,411
Warranty expense
7,006
Estimated liability under warranties
12,417
c. Warranty expense
12,417
Estimated liability under warranties
12,417
d. Retained earnings
12,417
Estimated liability under warranties
12,417
2. The total receivable from the bank representing dealers fund reserve as of March 31,
2006 is:
a. P 5,100
b. P 6,900
c. P 12,000
d. P 14,000
3. Sales in 2004 were (over) understated by
a. P 6,500
b. P (6,500)
c. P 7,800
d. P (7,800)
4. Sales in 2006 were (over) understated by:
a. P 6,500
b. P (6,100)
c. P (5,590)
d. P (11,690)
31
5. The accrued Salaries Payable that should be set up on March 31, 2006 is:
a. P 18,000
b. P 28,000
c. P 10,000
d. P 40,000
6. The audited balance of Discount on Note Payable as of March 31, 2006 is:
a. P 0
b. P 102, 452
c. P 149, 211
d. P 190, 192
7. Depreciation Expense for fiscal year 2006 that should be provided on the equipment
purchased on April 1, 2005 is
a. P 13,660
b. P 40,981
c. P 60,000
d. P 66,000
Solution
Adjusting entry:
b.
c.
d.
e.
f.
g.
Sales
5,590
Accounts receivable
Inventory
4,300
Cost of sales
Sales
6,100
Retained earnings - beg
Warranty expense
12,417
Estimated warranty payable
2004
940,000 – 7,800
2005
1,010,000 + 6,100 – 7,800
2006
1,795,000 – 5,590 – 6,100
Adjusted balance
X ½ of 1%
Total Warranty expense
Less: Warranty paid
Estimated warranty liability
Fund reserve from the bank
14,000
Other income
OE: Delivery equipment
600,000
Notes payable
CE: Delivery equipment
409,808
Discount on NP
190,192
Notes payable
Adj: Discount on NP
190,192
Delivery equipment
Adj: Interest expense
40,981
Discount on NP
P409,808 x 10% = P 40,981
Retained earnings
18,000
Salaries
Salaries
10,000
Accrued salaries
Answer:
1. C
2. D
3. D
4. D
5. C
6. C
5,590
4,300
6,100
12,417
= 932,200
= 1,023,900
= 1,783,310
= 3,739,410
=
.005
=
18,697
=
6,280
=
12,417
14,000
600,000
600,000
190,192
40,981
18,000
10,000
7. B
Problem 14
You are auditing the accounts of Keith Zandro Merchandising Corporation for the year ended
December 31, 2006. You discover that the adjustments made in the previous audit for the
year 2005 were not entered in the accounts by Keith Zandro’s bookkeeper; therefore, the
accounts are not in agreement with the audited amounts as of December 31, 2005. The
following adjustments were included in the 2005 audit report:
a. Invoices for merchandise purchased on credit in December 2005 were not entered on
the books until payment of P12,000 was made in January 2006. The merchandise was
not included in the December 31, 2005 inventory. The company uses a periodic
inventory system.
32
b. Invoices for merchandise received on credit in December 2005 were not recorded in the
accounts until payment was made in January 2006; the goods were included in the 2005
ending inventory, P18,000.
c. Allowance for doubtful accounts for 2005 was understated by P2,000 because bad debts
expense in 2005 was not recorded.
d. Selling expense for 2005, P5,000, was not recorded in the accounts until paid in 2006.
e. Accrued wages of P4,000 at December 31, 2005, were not recorded in the accounts until
paid in January 2006.
f.
Prepaid insurance at December 31, 2005 was understated by P600 because this amount
was included in 2005 expense. The insurance policy expires on December 31, 2006.
g. Income tax expense of P2,400 for the last part of the year ended December 31, 2005,
was not recorded until paid in January 2006.
h. Depreciation of P9,000 was not recorded for 2005.
Questions:
Based on the information given, answer the following:
1. Net income of 2005 is overstated by
a. P 40,400
b. P 39,800
c. P 38,400
d. P 29,400
2. Net income of 2006 is understated by
a. P 40,800
b. P 39,800
c. P 28,800
d. P 27,800
3. Operating expenses of 2005 is understated by
a. P 21,800
b. P 21,800
c. P 20,600
d. P 19,400
4. Operating expense of 2006 is overstated by
a. P 21,800
b. P 10,800
c. P 9,000
d. P 8,400
5. Cost of sales of 2006 is
a. Overstated by P18,000
b. Understated by P18,000
c. Understated by P6,000
d. Not affected with error
Solution
A. Omission of purchases
Omission of inventory
B. Omission of purchases
C.
D
E
F
G
H
NET INCOME
2005
2006
(12,000)
12,000
12,000
(12,000)
(18,000)
18,000
(2,000)
(5,000)
5,000
(4,000)
4,000
600
(600)
(2,400)
2,400
(9,000)
_______
(39,800)
28,800
33
OPERATING EXPENSES
2005
2006
A
B.
C.
D
E
F
G
H
Answer:
1. B
2. C
3. D
4. D
(2,000)
(5,000)
(4,000)
600
5,000
4,000
(600)
(9,000)
(19,400)
_______
8,400
5. A
Pro0blem 15
Tuburan Company was organized during 2002 by three technical experts to assemble (parts
to be purchased from suppliers) and market an electronic device that they had previously
patented. No products were sold during 2002; however, 2003 and 2004 produced significant
sales, but modest profits. During 2003, the company hired bookkeeper who, although very
industrious, had very little knowledge of accounting. Realizing this competency problem, the
company is considering engaging an outside independent CPA to as they said “straighten
things out and make recommendations.” Among numerous other accounting problems,
adjusting entries have never been made. The bookkeeper stated that “the transactions are
recorded in the right way when they occur.”
The following 2005 transactions, and the way in which the bookkeeper recorded or
explained them, are being discussed:
a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count).
Inventory of parts
17,000
Purchases
17,000
b. Depreciation – equipment (purchased at the beginning of 2004) cost, P80,000;
estimated useful life, 10 years; manufacturer’s recommended value at end of 5 years,
P10,000.
Depreciation expense
7,000
Equipment
7,000
c. Unpaid wages at year-end 2004, P3,000; 2005, P11,000.
Record when paid, because that is when the wages requires the payment of resources
and “it all events out anyway.”
d. Note payable, P60,000, five-year, 15%, interest payable each October 31; signed
November 1, 2004.
Interest expense
9,000
Cash
9,000
Because this is the correct amount of interest each year
e. Contract to deliver six electronic devices, signed October 15, 2005, pending assembly,
P45,000.
Due from customers
45,000
Sales
45,000
f.
34
Property taxes for 2005, billed in November 2005, payable without penalty up to
February 15, 2004, P9,000. Paid on February 14, 2006.
February 14, 2006:
Property taxes
Cash
9,000
9,000
g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the 30day credit period, on January 26, 2006.
January 26, 2006:
Advertising
Cash
17,000
17,000
Questions:
Based on the information given, answer the following:
1. Interest expense of the P60,000 note at December 31, 2005 is
a. P 10,500
b. P 9,000
c. P 7,500
d. P 1,500
2. Interest payable at December 31, 2005 is
a. P 9,000
b. P 7,500
c. P 1,500
d. P
3. Inventory at December 31, 2005 is
a. P 64,000
b. P 47,000
c. P 30,000
d. Cannot be determined
4. Wages expense at December 31, 2005 is
a. Understated by P 14,000
b. Understated by P 11,000
c. Understated by P 8,000
d. Correctly stated
5. Accrued expenses at December 31, 2005 is understated by
a. P 38,500
b. P 12,500
c. P 11,750
750
d. P 11,000
Solution
1. B
P 60,000 x 15% = P 9,000
2. C
P 60,000 x 15% x 2/12 = P 1,500
3. B
Given in item A
4. C
Retained earnings
3,000
Wages expense
3,000
Wages expense
11,000
Wages payable
11,000
5. A
Interest payable
1,500
Wages payable
11,000
Property taxes
9,000
Advertising
17,000
Total
38,500
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Problem 16
Branzuela Corporation reported the following amounts of net income for the years ended
December 31, 2003, 2004 and 2005:
2003
2004
2005
P127,000
150,000
128,500
You are performing the audit for the year ended December 31, 2005. 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, 2004
December 31, 2005
P14,000 understated
P23,000 overstated
b. On December 29, 2005, Branzuela recorded as a purchase, merchandise in transit,
which cost P15,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.
c. Branzuela records sales on the accrual basis but failed to record sales on account made
near the end of each year as follows
2003
2004
2005
P4,000
5,000
3,500
d. The company failed to record accrued office salaries as follows:
December 31, 2003
December 31, 2004
P10,000
14,000
e. On March 1, 2004, 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
Common stock
Retained earnings
f.
P13,000
10,000
3,000
On July 1, 2004, Branzuela acquired a three-year insurance policy. The three-year
premium of P6,000 was paid on that date, and the entire premium was recorded as
insurance expense.
g. On January 1, 2005, Branzuela retired bonds with a book value of P120,000 for
P106,000. The gain was incorrectly deferred and is being amortized 10 years as a
reduction of interest expense on other outstanding obligations.
Questions:
1. What is the adjusted net income for the year ended December 31, 2003?
a. P133,000
b. P121,000
c. P117,000
d. P113,000
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2. What is the adjusted net income for the year ended December 31, 2004?
a. P159,000
b. P160,000
b. P179,000
c. P187,000
3. What is the adjusted net income for the year ended December 31, 2005?
a. P129,600
b. P131,600
c. P139,600
d. P142,600
4. What adjusting entry should be made on December 31, 2005 to correct the error
described in item B?
a. Accounts payable
15,000
Purchases
15,000
b. Purchases
15,000
Accounts payable
15,000
c. Accounts payable
15,000
Cash
15,000
d. Accounts payable
15,000
Retained earnings
15,000
5. The adjusting entry on December 31, 2004 to correct the error described in item E
should include a debit to
a. Common stock P10,000
c. Additional paid in capital, P3,000
b. Retained earnings, P16,000
d. Miscellaneous expenses, P3,000
Solution
Unadjusted Net Income
A
2003
127,000
2004
150,000
14,000
4,000
(4,000)
5,000
B
C
D
(10,000)
E
F
G
Adjusted Net Income
Answer:
1.
B
2. A
___________
121,000
3. D
2005
128,500
(14,000)
(23,000)
15,000
(5,000)
3,500
10,000
(14,000)
13,000
5,000
14,000
(2,000)
14,000
(1,400)
129,600
___________
179,000
4. A
5. B
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