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296038742 Correction of Errors. Reviewer and
Building and Enhancing New Literacies Across The Curriculum (Western Philippines University)
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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
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Supplies expense
a.
b.
c.
d.
xxxx
To recognize supplies used, if purchases of supplies are recorded in supplies.
To recognize supplies on hand, if purchases of supplies are recorded in supplies expense.
To record the purchase of supplies during or at the end of the period.
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
Wages payable
b. Prepaid expense
Wages expense
c. Wages expense
Prepaid wages
d. Wages payable
15,000
15,000
15,000
15,000
15,000
15,000
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
d. Consulting revenue receivable
Unearned consulting revenue
xxx
xxx
xxx
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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 calendaryear 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
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
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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
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
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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
18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors made at
December 31, 2006:
Failed to accrue P50,000 interest expense
Failed to record depreciation expense on office equipment of P80,000
Failed to amortize prepaid rent expense of P100,000
Failed to delay recognition of prepaid advertising expense of P60,000
The net effect of these errors was to overstate net income for 2006 by
b. P 170,000 c. P 230,000
d. P 290,000
a. P 130,000
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
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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?
a.
b.
c.
d.
Year
2005
2006
2005
2006
2005
2006
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
Assets
P 1,000,000
Liabilities
750,000
Contributed capital 120,000
Dividends paid
100,000
2006
P1,200,000
800,000
120,000
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
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
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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
depreciation - machine 30,000
Machine
Accumulated
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.
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
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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
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
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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
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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
b.
c.
Retained earnings
Depreciation expense
Accumulated depreciation
Retained earnings
Depreciation expense
Accumulated depreciation
34,000
17,000
17,000
51,000
34,000
17,000
17,000
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Depreciation expense
17,000
d.
Accumulated depreciation
17,000
Retained earnings
17,000
2. The entry to record the adjustment of item “c”:
a.
No adjustment.
b.
Retained earnings
170,000
Estimated liability
170,000
c.
Loss on damages
170,000
170,000 d. Loss on damages
Cash
170,000
3. Net income of 2005 is overstated by:
a. P 460,400
b. P 318,400
c. P 107,000
4. Net income of 2006 is overstated by:
a. P 367,000
b. P 312,000
c. P 103,400
Solution
a. Accumulated depreciation
Depreciation expense (2006)
17,000
Estimated liability
170,000
d. P 73,000
d. P 69,400
51,000
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
34,000
90,000
174,000
6,800
4,400
2005
17,000
(90,000)
-
Item A
Item B
Item C
Item D
Item E
Item F (6,800) Item G ___________ __________ 4,400
Net Effect
17,000
(73,000
2006
17,000
90,000
(174,000)
(69,400)
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Answer:
1. B
2. A
3. D
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.
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:
Date
Item
Jan 1 Balance
Dec 31
Net income for year
2005 Jan 10 Dividends paid 15,000
over par
Dec31
Net loss for year
2006 Jan 10 Dividend paid 15,000
Dec 31
Net loss for year
Debit
2004
Credit
81,000
18,000
Mar 6 Stock sold – excess
32,000
11,200
12,400
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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
2004
2005
2006
Unadjusted Net income/Loss
18,000
(11,200)
(12,400)
Item B
(1,200)
(1,200)
(1,200)
Item C
3,000
(3,000)
4,300 (4,300) Item D – unrecorded ending inv.
3,800 (3,800)
5,500
- unrecorded purchases
(3,800) 3,800
(5,500) Item E
(2,100) 2,100
(1,700) Item F
1,200 (1,200)
___________ __________
2,500
Adjusted net income/loss
19,800
(12,000)
(16,200)
Retained earnings – beg.
81,000
94,600
67,600
Item A
(15,000)
(15,000)
Item B – error in recording improv.
9,600
- unrecorded depreciation (800)
_________
____________
Retained earnings - end
94,600
67,600
51,400
Answer:
1. A
2. C
3. A
4. C
5. C
6. A
Problem 3
A partial trial balance of Josh Alejandro Corporation is as follows on December 31, 2006:
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Supplies on hand
Accrued salaries and wages
Interest receivable on investments
Prepaid insurance
Unearned rent
Accrued interest payable
Dr.____
P 13,500
____Cr.____
P 7,500
25,500
450,000
-075,000
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 correct figure of
P250,000.
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
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
c. P 364,500
d. P 342,500
c. P 125,000
d. P 0
c. P 5,500
d. P 2,500
5. Depreciation expense at year-end is:
a. Understated by P225,000
b. Overstated by P225,000
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c. Understated by P261,000
d. Overstated by P261,000
Solution
1. Supplies expense
8,000
Supplies on hand
2. Accrued salaries and wages
7,500
8,000
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
7,500
22,000
22,000
25,500
25,500
21,750
21,750
125,000
Prepaid insurance
5. Retained earnings
125,000
70,000
Rent income
6. Depreciation expense
225,000
70,000
Accumulated depreciation
7. Retained earnings
Accumulated
depreciation Answer:
1. B
2. C
225,000
36,000
36,000
3. B
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.
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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
3. 2005 net income is overstated by:
a. P 232,200
b. P 229,200
c. P 113,080
d. P 3,000
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
114,600
Sales
b. Sales
earnings
114,600
114,600
Accounts receivable
114,600
Sales
d. Sales
114,600 c. Retained
114,600
114,600
Retained earnings
Solution
1. Retained earnings
114,600
114,600
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2.
3.
Sales
Cost of sales (beg. inv)
25,920
Retained earnings
Retained earnings
1,450
Interest expense
1,552
Discount on bonds payable
3,002 Int. paid
Int. exp.
Carrying
114,600
25,920
Amort.
Value
235,000 2002 15,000 16,450 1,450
236,450
2003
4.
15,000
Retained earnings
Repairs expense
Equipment
Accumulated depreciation
Retained earnings
Depreciation expense
Accumulated depreciation
Depreciation expense
16,552
1,552
238,002
25,500
30,000
55,500
5,100
2,550
2,550
3,000
3,000
2002
2003
Unadjusted net income
303,000
232,200
Item 1
(114,600)
114,600
Item 2
25,920
(25,920)
Item 3
(1,450)
(1,552)
Item 4
(25,500)
(30,000 - error in recording
depreciation
2,550 2,550
__________
3,000
Adjusted net income
189,920
294,878
Answer:
1. D
2. A
3. C
4. A
5. C
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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
700,000
Non-current assets 2,000,000
_________
Total Assets
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 December 31, 2006 was not recorded
until January 2, 2007.
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.
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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.
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
d. P 25,000
c. P 107,500
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
c. Cost of sales
42,500
Retained earnings
d. Retained Earnings
42,500
Inventory
Solution
1. Depreciation expense
Accumulated depreciation
2. Cost of sales (beg. inv)
Retained earnings
42,500
42,500
42,500
16,000
16,000
95,000
95,000
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Cost of sales
42,500
Inventory
42,500
4. Cash
28,000
Accounts receivable
28,000
5. Accumulated depreciation
110,000
Machinery
91,500
Gain on sale
18,500
6. Loss on damages
625,000
Estimated liability on damages
625,000
7. Unrealized holding loss
26,000
Valuation allowance
26,000
Market value – beg.
190,000
Market value – end
164,000
Unrealized holding loss
26,000
8. Salaries payable
48,000
Salaries expense
48,000
To reverse accrued salaries.
Salaries expense
36,600
Salaries payable
36,600
9. Equipment
1,600,000
Repairs expense
1,600,000
Depreciation expense
200,000
Accumulated depreciation
200,000
10. Insurance expense
25,000
Prepaid insurance
37,500
Retained earnings
62,500
11. No amortization since no information about its impairment.
3.
Answer:
1. C
2. B
3. B
4. D
5. B
6. A
7. A
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
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Accumulated Depreciation
Total Assets
( 280,000)
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
Cost of sales
Gross Profit
Operating Expenses
Selling and administrative
1,700,000
570,000
1,130,000
448,000
Depreciation
42,000
Income before income tax
Income tax expense
Net Income
640,000
192,000
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, 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.
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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
30,000
Gain on sale
2. Loss on market decline
13,000
Allowance for market decline
3. Cost of sales
66,000
Inventory
4. Equipment
48,000
Retained earnings
5. Depreciation
8,000
Accumulated depreciation 6. Loss on damages
60,000
Estimated liability on damages
Answer:
1. A
2. D
3. A
4. A
30,000
13,000
66,000
48,000
8,000
60,000
5. C
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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:
Year ending 12/31
2004
P63,000
Income, pretax
2005
P 70,763
2006
P 61,880
During the examination of the accounts, you found the data given below:
For year ended Dec. 31
2004
2005
2006
Omission from the books
a. Accrued expenses at end of year
b. Earned (uncollected) revenue at end
P 15,120
of year
c. Prepaid expenses at end of year
d. Unearned revenue (collected in advance)
at end of year
6,314
P 14,658 P 32,368
1,400
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
f.
(ownership passed)
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.
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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
c. P 51,082
d. P 42,682
c. P 21,640
d. P 35,350
3. Adjusted net income of 2006 is:
a. P 86,502
b. P 56,682
4. Inventory at year-end is understated by:
a. P 3,370
b. P 7,930
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
Solution
Unadjusted net income
Item A
2004
63,000
(15,120)
Item B
Item C
1,400
6,314
Item D
Item E
2005
70,763
15,120
(14,658)
2006
61,880
(1,400)
(6,314)
8,470
(4,270)
18,270
Item F
Item G
Item H
Adjusted net income
Answer:
1. C
2. B
-
-
(3,500)
52,094
(4,900)
81,081
3. C
4. C
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:
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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
December 31, 2005
4.
5.
6.
7.
8.
9.
Uncollectible accounts receivable of P9,000 are to be written off.
Marketable Securities costing P15,000 were at a market value of only P9,000.
Gain of P3,000 on sale of fully depreciated equipment was credited to the allowance for depreciation.
Land cost of P9,000 had been erroneously charged to expense.
The inventory is overstated by P14,300 because of an error in footing an inventory price sheet.
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:
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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 b. Retained earnings
9,000
9,000
Accounts receivable c. Retained earnings
9,000
9,000
Allowance for bad debts
9,000
d. No adjusting entry is necessary
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
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Retained earnings
7. Land
Retained earnings
8. Retained earnings
Cost of sales
9. Retained earnings
Accumulated depreciation
10. Machinery
Accounts payable – others
Taxes
3,000
9,000
9,000
14,300
14,300
5,000
5,000
12,000
12,000
5,900
Accrued taxes
5,900
2004
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
(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:
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___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
inventory
25,000
Unearned rent received taken into income
9,000
Accrued
taxes unrecorded
20,000
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
2005
Unadjusted net income
123,250
2006
156,250
12,500
5,000
(5,000)
15,000
(25,000)
25,000
(9,000)
Adjusted net income
Answer:
1. C
2. A
(20,000)
20,000
__________
83,250
(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
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TRIAL BALANCE
December 31, 2006
Debits
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
Accounts payable
Wizard, Drawings
Wizard, Capital, 12/31/05
Sales
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
Additional information:
Credits
P
567,000
297,500
2,180,500
11,427,500
_________
P 14,472,500
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:
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2006
P33,750
36,000
P69,750
Taxes and licenses
Utilities
2005
P20,250
24,750
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 96,250
c. P 50,750
d. P0
5. Property and equipment, net
a. P 2,856,000
b. P 2,616,469
c. P 2,039,625
6. Accounts payable
a. P 533,750
b. P 523,750 c. P 297,500 d.P 236,250
7.
8.
9.
Accrued Expenses
a. P 114,750
b. P 69,750
c. P 24,750
d. P0
Wizard, Drawings
a. P 707,500
b. P 480,000
c. P 227,500
d. P0
Wizard, Capital, 12/31/05
P 2,226,000 b. P 2,181,000
a.
10. Sales
a. P 11,842,500
c. P 2,180,500
b. P 11,559,000
d. P 1,858,500
d. P 2,135,500
c. P 11,427,500
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d. P 11,296,000
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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
17. Depreciation expense
a. P 294,375
c. P 239,531
18. Cost of sales
a. P 5,386,500
b. P 249,375
d. P 0
d. P 210,000
b. P 5,368,500 c. P 5,150,250 d. P 4,065,000
19. Estimated loss from lawsuit
a. P 4,000,000
b. P 3,000,000 c. P 500,000
d. P0
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
8. A
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9.
10.
11.
12.
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
B
B
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
B
D
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
13. B
Taxes and licenses – cash basis
- 217,000
+ Accrued taxes – end
- 33,750
- Accrued taxes – beg
- 20,250
Taxes and licenses – accrual basis - 230,500 14. B
Insurance expense – cash basis
- 152,250
+ Prepaid insurance – beg
- 45,500
- Prepaid insurance – end - 50,750 Insurance expense – accrual basis 147,000
15. B
Utilities – cash basis
- 220,500
+ Accrued utilities – end
- 36,000
- Accrued utilities – beg
- 24,750
Utilities – accrual basis
- 231,750
16. A – given in item # 2
17. B – refer to Question # 5 question
18. A
Beginning inventory
- 1,085,000
Purchases
- 5,575,500
Ending inventory
- (1,274,000)
Cost of Sales
- 5,386,500
19. C
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Since there is a comprehensive insurance policy for the damage, only P500,000 will be charged as loss
(3M –
2.5M)
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:
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
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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 in the books:
Land . . . . . . . . . . . . . . .
P 40,000.00 Treasury stock . . . . . . . .
. . . . . . P 35,000.00
Gain on Sale of treasury stock . . . . .
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
3. 2006 merchandise inventory is:
a. Understated by P 10,000.00
c. Overstated by P 3,000.00
b. Understated by P 4,000.00
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
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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)
Current Service and interest cost
P 620,000.00
Expected return on Plan Asset
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(P 1,000,000.00 x 10%)
Pension Expense
Reported pension expense
Prepaid Pension Cost
Answer:
1. C
2. A
3. C
4. A
5. A
6. D
( 100,000.00)_
P 520,000.00
1,000,000.00
P 480,000.00
7. D
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
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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
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
d. P 180,000
Solution
2004
9,000
(1,800)
A
B
C
D
E
2005
2006
(1,800)
(1,800)
112,000
(112,000)
(120,000)
F
Under/(Over)
Answer:
1. D
2. B
3. B
_________
7,200
144,000
134,200
120,000
(120,000)
(72,000)
185,800
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
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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. You learned that the consigned goods were sold
the following year.
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.
Sales per books and warranty costs were:
Warranty of Expense for Sales Made in
Year Ended March 31 Sales
2004
2005 2006
Total
2004
P940, 000 P760
P760
2005
1, 010, 000
360
P1, 310
1, 670
2006
1, 795, 000
320
1, 620 P1, 910
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………………………………….
2005………………………………….
2006………………………………….
P 12, 000
18, 000
10, 000
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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)
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. Sales
Accounts receivable
Inventory
Cost of sales
4,300 c. Sales
5,590
5,590
4,300
6,100
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Retained earnings - beg
6,100 d. Warranty expense
12,417
Estimated warranty payable
12,417
2004 940,000 – 7,800
= 932,200
2005 1,010,000 + 6,100 – 7,800
= 1,023,900
2006 1,795,000 – 5,590 – 6,100
= 1,783,310
Adjusted balance
= 3,739,410
X ½ of 1%
=
.005
Total Warranty expense
= 18,697
Less: Warranty paid
=
6,280
Estimated warranty liability
= 12,417
e. Fund reserve from the bank
14,000
Other income
14,000
f. OE: Delivery equipment
600,000
Notes payable
CE: Delivery equipment
600,000
409,808
Discount on NP
190,192
Notes payable
Adj: Discount on NP
600,000
190,192
Delivery equipment
Adj: Interest expense
Discount on NP
P409,808 x 10% = P 40,981
g. Retained earnings
Salaries
Salaries
190,192
40,981
40,981
18,000
18,000
10,000
Accrued salaries
Answer:
1. C
2. D
3. D
10,000
4. D
5. C
6. C
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:
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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.
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
5. Cost of sales of 2006 is
a. Overstated by P18,000
b. Understated by P18,000
d. P 8,400
c. Understated by P6,000
d. Not affected with error
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Solution
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
A. Omission of purchases
Omission of inventory
B. Omission of purchases
C.
D
E
F
G
H
OPERATING EXPENSES
2005
2006
A
B.
C.
(2,000)
D
(5,000)
5,000
E
(4,000)
4,000
F
600
(600)
(9,000)
_______
(19,400)
8,400
G
H
Answer:
1. B
2. C
3. D
4. D
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
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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
Purchases
17,000
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
Sales
f.
45,000
45,000
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
9,000
Cash
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:
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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
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
d. P 11,000
Solution
1. B
P
2.
60,000 x 15% = P 9,000
C
60,000 x 15% x 2/12 = P 1,500
Given in item A
P
3. B
4. C
Retained earnings
Wages expense
Wages expense
Wages payable
5. A
Interest payable
Wages payable
Property taxes
Advertising
Total
3,000
3,000
11,000
11,000
1,500
11,000
9,000
17,000
38,500
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d. P 750
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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.
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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
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
b. Purchases
15,000
15,000
Accounts payable
c. Accounts payable
15,000
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
b. Retained earnings, P16,000
c. Additional paid in capital, P3,000
d. Miscellaneous expenses, P3,000
Solution
Unadjusted Net Income
2003
127,000
2004
150,000
A
B
C
5,000
2005
128,500
14,000
(
14,000)
(23,000)
15,000
4,000
(
4,000)
(5,000)
3,500 D (10,000) 10,000
(14,000)
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14,000
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13,000
5,000 (2,000)
14,000 ___________
___________ (1,400)
179,000
129,600
E
F
G
Adjusted Net Income
Answer:
1.
B
2. A
121,000
3. D
4. A
5. B
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