CHAPTER 8
ERRORS AND THEIR CORRECTIONS
PROBLEMS
8-1.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
8-2.
2011 profit
Understated
Overstated
Overstated
Understated
No effect
Overstated
No effect
Overstated
Overstated
Understated
Overstated
2012 profit
Overstated
Understated
Understated
Overstated
No effect
No effect
No effect
understated
Understated
Overstated
Understated
(JOY COMPANY)
Understatement of 12/31/11 inventory
Overstatement of 12/31/12 inventory
Understatement of 2011 depreciation expense
3-year insurance premium charged to expense in 2011
Unrecorded sale of fully depreciated machine in 2012
Net understatement (overstatement)
8-3.
(TOY COMPANY)
Reported profit
Overstatement of 2011 ending inventory
Understated 2011 accrued expenses
Unrecognized supplies inventory, end of 2012
Corrected profit
8-4.
Understatement (overstatement)
12/31/12
12/31/12
Working
Retained
2012 Profit
Capital
Earnings
(48,000)
--(40,500)
(40,500)
(40,500)
--(11,500)
(110,000)
110,000
110,000
75,000
75,000
75,000
P(123,500)
P144,500
P133,000
2011
P195,000
( 36,000)
( 40,000)
_
P119,000
2012
P210,000
36,000
40,000
15,000
P301,,000
(BOY, INC.)
Understated 2011 ending inventory
Overstated 2011 depreciation expense
Understated 2012 ending inventory
Understated 2012 depreciation expense
Net understatement in retained earnings
Effect on 12/31/12 Retained Earnings
Understated (Overstated)
0
12,500
5,000
( 4,000)
P13,500
Retained earnings as of December 31, 2012 should be increased by P13,500
45
Chapter 8 – Errors and their Corrections
8-5.
(COY COMPANY)
(a)
a.
Prepaid insurance
Operating expenses
Retained earnings
b.
c.
d.
e.
9,300
3,100
12,400
Retained Earnings
Trading Securities
16,750
Trading Securities
Unrealized Gains on Trading Securities
202,500 – 178,250 = 24,250
24,250
16,750
Operating Expenses
Allowance for Bad Debts
98,000 – 92,500 = 5,500
24,250
5,500
5,500
Retained earnings
Cost of goods sold
37,750
Cost of goods sold
Inventory
49,500
Machinery
Operating expenses
Retained earnings
Accumulated depreciation
75,000
6,250
37,750
49,500
68,750
12,500
(b)
Reported net income
Adjustments: a.
b.
c.
d.
e.
Corrected profit
8-6.
2011
P487,500
12,400
(16,750
(37,750)
68,750
P514,150
2012
P550,000
( 3,100)
24,250
(5,500)
37,750
(49,500)
( 6,250)
P547,650
(SOY COMPANY)
2011
P145,000
(6,500)
Reported profit
(a)Rent income of 2012 recorded in 2011
(b)Omission of unused supplies
End of 2010
End of 2011
End of 2012
(c) Omission of accrued salaries
End of 2010
End of 2011
End of 2012
Corrected profit
(6,500)
3,700
5,500
(7,500)
P133,700
46
2012
P185,000
6,500
(3,700)
7,100
7,500
(4,700)
P197,700
Chapter 8 – Errors and their Corrections
8-7.
(FELLOW COMPANY)
a.
b.
c.
d.
8-8.
Equipment
Accumulated depreciation
Operating expenses
120,000
Profit from self-construction
Warehouse
100,000
Operating expenses
Accumulated depreciation
1,200,000 – (60,000 x 5 yrs) =900,000
900,000/(14-5) = 100,000
100,000
Operating expenses
Accumulated depreciation
Gain on sale of machine
Machine
20,000
130,000
20,000
100,000
100,000
100,000
30,000
120,000
(DOY CORPORATION)
Initial amounts
Adjustments: 1.
2.
3.
4.
5.
6.
7.
8.
Adjusted amounts
Inventory
P1,750,000
50,000
20,000
26,000
25,000
30,000
2,000
P1,903,000
Accounts Payable
P1,200,000
50,000
60,000
4,000
P1,264,000
47
Net Sales
P8,500,000
(35,000)
(40,000)
P8,425,000
Chapter 8 – Errors and their Corrections
8-9.
(SOY COMPANY)
(a)
Reported profit (loss)
a. Failure to record accrued expenses
2010
2011
2012
b. Overstated ending inventories
2010
2011
2012
c. Failure to record accrued interest revenue
2010
2011
2012
d. Failure to recognize unearned rent
2010
2011
2012
e. Failure to record purchases on account
2011
2012
f. Repairs expense erroneously capitalized
2011 (120,000 – 12,000)
2012 (80,000 – 8,000)
g. Failure to recognize prepaid insurance
2010
2011
2012
Correct profit
(b)
Correcting entries
a.
Retained earnings
Expenses
Accrued expenses
b.
c.
d.
e.
2010
P490,000
2011
P670,000
(34,000)
34,000
(28,000)
(63,000)
12,000
(24,000)
63,000
(28,000)
(12,000)
6,000
24,000
(20,000)
(25,000)
2012
P(320,000)
28,000
(43,000)
28,000
(43,000
(6,000)
8,000
20,000
(18,000)
25,000
(20,000)
(108,000)
(72,000)
4,800
________
P385,800
(4,800)
6,200
________
P577,400
(6,200)
7,800
P(411,400)
28,000
15,000
43,000
Retained earnings
Cost of goods sold
Inventory
28,000
15,000
43,000
Interest receivable
Retained earnings
Interest revenue
8,000
6,000
2,000
Retained earnings
Rent revenue
Unearned rent
20,000
Retained earnings
Accounts payable
Cost of goods sold
25,000
2,000
18,000
20,000
5,000
48
Chapter 8 – Errors and their Corrections
f.
g.
Retained earnings
Accumulated depreciation
Expenses
Property, plant and equipment
Prepaid insurance
Retained earnings
Expenses
108,000
20,000
72,000
200,000
7,800
6,200
1,600
MULTIPLE CHOICE
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10
MC11
MC12
MC13
MC14
MC15
B
C
A
A
B
A
A
C
A
A
D
A
D
C
C
MC16
MC17
MC18
MC19
MC20
MC21
MC22
MC23
MC24
MC25
MC26
MC27
MC28
MC29
MC30
MC31
MC32
MC33
MC34
MC35
MC36
B
B
D
B
C
D
A
A
A
D
D
A
A
A
C
D
C
C
D
D
D
MC37
MC38
MC39
MC40
D
D
B
C
200,000/5 = 40,000
30,000 over + 27,000 over + 7,500 over – 48,000 under = 16,500 net overstatement.
27,000 over – 7,500 under – 48,000 under = 28,500 net understatement.
27,000 over + 6,000 over – 48,000 under – 7,500 under = 22,500 net understatement.
250,000 – 100,000 + 150,000 – 50,000 – (30,000 x 4/6) + (120,000 x 18/24 = 320,000
1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
312,500 + 25,000 - 4,000 – 50,000 – 18,000 – 30,000 = 235,500
10,000 – 8,000 = 2,000 net understated
10,000 + 25,000 – 8,000 = 27,000 net understated
2011 net income : 8,000 overstated – 2,000 understated ; 2012 net income 8,000
understated – 2,000 overstated.
2,300,000 + 60,000 – 40,000 – 50,000 + 100,000 = 2,370,000
10,000 – 7,700 = 2,300
258,000 – 7,700 = 250,300
589,500 – 112,500 – 16,000 = 461,000
613,400 + 90,000 + 12,000 – 28,000 = 687,400
20,000 + 13,500 – 8,000 = 25,500
The shares are treasury shares and not investment in shares
300,00 – 80,000 = 220,000
60,000 – 4,000 – 12,000 = 44,000
434,900 + 12,000 = 446,900
60,000 + 15,000 = 75,000
1,500,000 X 12% x 10/12 = 150,000
Retained earnings beginning of 430,000 as reported – correction of prior period errors of
P20,500 ( - 36,000 + 31,500 – 16,000) + 2010 corrected net income of 298,800
2,500,000 – 112,500 – 50,000 – 80,000 = 2,257,500
1,300,000 – 90,000 – 36,000 + 28,000 = 1,202,000
500,000 + 7,700 + 30,000 + 18,000 + 8,000 – 4,000 – 16,000 + 15,000 = 558,700
49
Chapter 8 – Errors and their Corrections
MC41
A
MC42
MC43
MC44
MC45
MC46
MC47
B
A
D
B
A
C
80,000 + 18,000 + Accrued interest of 150,000 * ( although finance costs should be
presented separately, as required by PAS 1, total interest cost included in other losses and
expenses is 190,000); thus, other losses and expenses = 248,000 – 190,000 = 58,000
30,000 – 4,000 = 26,000
20,000 + 31,500 = 51,500
75,000 + 16,000 = 91,000
430,000 – 36,000 + 31,500 – 16,000 = 409,500
950,000 + 36,000 = 986,000
450,000 – 31,500 + 16,000 = 434,500
Correcting entries in 2012 for Take One Corporation (MC 17 – 47)
Operating Expenses
Cash
7,700
7,700
Sales
112,500
Accounts receivable
112,500
Inventories
Cost of Sales
90,000
Allowance for Bad Debts
Accounts Receivable
16,000
90,000
16,000
Operating Expenses
Allowance for Bad Debts
30,000
Inventories
Accounts Payable
12,000
Retained Earnings
Cost of Sales
36,000
Cost of Sales
Inventories
28,000
30,000
12,000
36,000
28,000
Treasury Stock
Investments in Stock
260,000
260,000
Operating Expenses
Prepaid Expenses
Retained Earnings
18,000
13,500
Operating Expenses
Prepaid Expenses
8,000
Accumulated Depreciation – Equipment
Operating Expenses
4,000
Sales
Accumulated Depreciation – Equipment
Loss on Sale of Equipment
Equipment
50,000
12,000
18,000
31,500
8,000
4,000
80,000
Interest Expense (Other Losses and Expenses)
Interest Payable
150,000
150,000
50
Chapter 8 – Errors and their Corrections
Mortgage Payable
Current Portion of Mortgage Payable
500,000
500,000
Retained Earnings
Operating Expenses
16,000
Operating Expenses
Accrued Expenses
15,000
Sales
80,000
16,000
15,000
Advances from Customers
80,000
Working Paper adjustments to restate 2011 financial statements
Cost of Sales
Inventory
36,500
Prepaid expenses
Operating Expenses
31,500
Operating Expenses
Accrued Expenses
16,000
Mortgage Payable
Current Portion of Mortgage Payable
500,000
36,500
31,500
16,000
500,000
51