Chap6 correction of errors PDF

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AUDITING PROBLEM REVIEWCorrection of ErrorsProblem 1(6-2)You discovered the following errors in connection with your examination of the financial statements of Pau Corporation:a. Accrued interest expense of Php30,000 was not recorded at the end of 2016. b. Accrued rent receivable of Php40,000 was no...

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AUDITING PROBLEM REVIEW Correction of Errors Problem 1(6-2) You discovered the following errors in connection with your examination of the financial statements of Pau Corporation: a. Accrued interest expense of Php30,000 was not recorded at the end of 2016. b. Accrued rent receivable of Php40,000 was not recorded at the end of 2016 c. The company paid one-year insurance premium of Php72,000 effective March 1, 2016. The entire amount was debited to expense account and no adjustment was made at the end of 2016. d. The company leased a portion of its building for Php60,000. The term of the lease is one year ending April 1, 2017. Collection of rent was credited to rent revenue account. At the end of 2016, no entry was made to take up the unearned portion of the amount collected. The following data were extracted from the financial statements of Pau Corporation: 2016 2017 Net Income Php 400,000 Php 320,000 Working capital 360,000 520,000 Retained Earnings, end 400,000 720,000 Based on the foregoing data, determine the following: 1. Net Income in 2016, ______________. 2. Working capital, end of 2016 __________. 3. Retained earnings, end of 2016 ____________. 4. Net Income in 2017, ________________. 5. Working capital, end of 2017 ___________. 6. Retained earnings, end of 2017 ____________. 7. Prepare adjusting entries assuming errors were discovered in (a) 2016; (b) 2017; and (c) 2018. NI(2016) WC (2016) RE(2016) NI (2017) WC(2017) RE(2017) UBal 400,000 360,000 400,000 320,000 520,000 720,000 a. ( 30,000) ( 30,000) ( 30,000) 30,000 b. 40,000 40,000 40,000 ( 40,000) c. 12,000 12,000 12,000 ( 12,000) d. ( 15,000) ( 15,000) ( 15,000) 15,000 --------------------------------------------------------------------------------------------------------407,000 367,000 407,000 313,000 520,000 720,000 ============================================================ Errors were discovered in 2016 1. Interest expense Interest payable 2. Interest receivable Interest revenue 3. Prepaid insurance Insurance expense 4. Rent revenue Unearned rent revenue

30,000 30,000 40,000 40,000 12,000 12,000 15,000

Errors were discovered in 2017 (Assuming books still open) 1. Retained earnings 30,000 Interest expense 2. Interest revenue 40,000

15,000

30,000

Retained earnings

40,000

3.

Insurance expense 12,000 Retained earnings 12,000 4. Retained earnings 15,000 Rent revenue 15,000 When the books are already closed, no necessary adjusting entries to be made. Errors were discovered in 2018 (No necessary adjusting entries to be made) Problem 2 (6-5) You have been asked by a client to audit financial statements of Camil Company for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end 2016 and 2017. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: 2016 2017 Inventory, end Php 20,000 (O) Php 16,000 (U) Advances to supplier were recorded as purchases but the merchandise was received in the following year.

40,000

80,000

Advances from customers recorded as sales but the goods were delivered in in the following year

40,000

140,000

Improvements on building had been charged as expense on January 1, 2016. Improvements have a life of 5 years

200,000

On January 1, 2016, an equipment costing Php80,000 was sold for Php40,000. At the date of sale, the equipment had an accumulated depreciation of Php30,000. The cash received was recorded as other income in 2016. Required: 1. What is the total effect of the errors on the 2016 net income? a. Understated by Php90,000 b. Understated by Php50,000 c. Overstated by Php230,000 d. Understated by Php10,000 e. Answer not given 2. What is the total effect of the errors on the 2017 net income? a. Overstated by Php64,000. b. Overstated by Php16,000. c. Overstated by Php136,000 d. Overstated by Php76,000 e. Answer not given. 3. What is the total effect of the errors on the company’s working capital at December 31, 2017? a. Overstated by Php44,000. b. Understated by Php96,000. c. Overstated by Php140,000. d. Overstated by Php60,000.

e. Answer not given.

4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2017? a. Understated by Php26,000. b. Understated by Php34,000. c. Overstated by Php366,000. d. Overstated by Php66,000. e. Answer not given. 5. Necessary adjusting journal entries at December 31. 2017 would require a net a. Debit to R/E Php90,000. b. Credit to sales Php100,000. c. Credit to Purchases Php40,000. d. Debit to Equipment Php80,000. e. Answer not given

Invty, end – 2016 (O); NI (O) Invty, end-2017 (U); NI (U) Purchases (O); NI (U)

Sales (O), NI (O)

Effects of Error in NI(2016) NI(2017) 20,000 ( 20,000) ( 16,000) ( 40,000)

40,000

Expenses (O), NI (U) ( 160,000) 200,000- (200,000/5)-160,000 Deprc exp. (U), NI (O) Other Income (O); NI (O) Loss (U); NI (O)

Selling Price Less: NBV Cost Less: Accum deprec

Loss on sale

WC (2017) (16,000)

40,000 ( 80,000)

(80,000)

( 40,000) 140,000

140,000

40,000

40,000 10,000 ----------------------------------------------( 90,000) 64,000 44,000 =========================== U O O Php

40,000

Php

80,000 30,000 ------------------50,000 -------------------Php 10,000 ===========

Effect of errors to Retained Earnings in 2017 Understatement to 2016 net income Php 90,000 Overstatement to 2017 net income 64,000 ------------------Net understatement to 2017 retained earnings Php 26,000 =========== Adjusting Journal Entries 1. Retained earnings, beginning Merchandise inventory, end

20,000 20,000

2.

3.

4.

5.

Merchandise inventory,end Cost of sales Purchases Retained earnings Advance supplier Purchases Retained earnings, beg Sales Sales Advances from customers Depreciation expense Improvements Accum deprec Retained earnings Accum deprec Retained earnings, beg Equipment

16,000 16,000 40,000 40,000 80,000 80,000 40,000 40,000 140,000 140,000 40,000 200,000 80,000 160,000 30,000 50,000 80,000

Problem 3 (6-1) You discovered the following errors in connection with your examination of the financial statements of Mari Company: a. Rental income of Php50,000 for 2016 was credited to Miscellaneous income account. b. Payment of Notes payable amounting to 56,000 was debited to Accounts payable. 2016 2017 Net Income Php 400,000 Php 320,000 Working capital 360,000 520,000 RE, end of the year 400,000 720,000 Required : Based on the foregoing data, Compute the following: 1. Net Income in 2016 a. Php400,000 c. Php450,000 b. Php406,000 d. Php456,000 e. answer not given. 2. Working capital, end of 2016 a. Php304,000 b. Php360,000

c. d. e.

Php416,000 Php450,000 Answer not given.

3. Retained earnings , end of 2016 a. Php400,000 c. b. Php406,000 d. e.

Php450,000 Php456,000 Answer not given.

4. Net income in 2017 a. Php214,000 b. Php270,000

5. Working capital, end 2017 a. Php464,000 b. Php456,000

c. d. e.

Php320,000 Php370,000 Answer not given

c. d. e.

Php520,000 Php570,000 Answer not given

6. Retained earnings, end of 2017 a. Php550,000 b. Php620,000

c. d. e.

Php720,000 Php826,000 Answer not given.

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017, and (c ) 2018. NI(2016)

WC(2016)

RE(2016)

NI(2017)

WC(2017)

RE(2017)

UBal 400,000 360,000 400,000 320,000 520,000 720,000 a b ------------------------------------------------------------------------------------------------------400,000 360,000 400,000 320,000 520,000 720,000 =========================================================== Assuming errors were discovered in 2016 a. Miscellaneous income Rent income b. Notes payable Accounts payable Assuming errors were discovered in 2017 a. no entry b. Notes payable Accounts payable Assuming errors were discovered in 2018 a. no entry b. Notes payable Accounts payable

50,000 50,000 56,000 56,000

56,000 56,000

56,000 56,000

Problem 4 (6-4) You discovered the following errors in connection with your examination of the financial statements of Alexis Company: a. The company paid one-year insurance premium of Php36,000 effective March 1, 2016. The entire amount was debited to asset account and no adjustments was made at the end of 2016. b. The company leased a portion of its building for Php30,000. The term of the lease is one year ending April 30, 2017. Collection of rent was credited to unearned rent revenue account. At the end of 2016 , no entry was made to take up the earned portion of the amount collected. c. Depreciation expense in 2016 was overstated by Php12,000. d. Improvements on building amounting to Php200,000 had been charged to expense on January 1, 2016. Improvements have a life of 4 years. e. On January 1, 2016, an equipment costing Php60,000 was sold for Php20,000. At the date of sale , the equipment had an accumulated depreciation of Php48,000. The cash received was recorded as other income in 2016. f. Repairs expense on the building amounting to Php20,000 had been charged to the building account on January 1, 2016. Depreciation

expense has been recorded in 2016 to 2017 based on the 4 year remaining useful life of the building.

The following data were extracted from the financial statements of Pau Company: 2016 2017 Net Income Php 200,000 Php 160,000 Working capital 180,000 260,000 RE, end of the year 200,000 360,000 Required: Compute the following: 1. Net income in 2016 a. Php194,000 b. Php206,000 2. Working capital, end of 2016 a. Php170,000 b. Php192,000 3. Retained earnings, end of 2016 a. Php194,000 b. Php206,000 4. Net Income in 2017 a. Php119,000 b. Php154,000 5. Working capital, end of 2017? a. Php254,000 b. Php260,000 6. Retained earnings, end of 2017 a. Php350,000 b. Php360,000

c. d. e.

Php216,500 Php325,000 Answer not given

c. d. e.

Php196,500 Php202,500 Answer not given

c. d. e.

Php216,500 Php325,000 Answer not given

c. d. e.

Php159,000 Php161,500 Answer not given

c. d. e.

Php276,000 Php267,500 Answer not given

c. d. e.

Php366,000 Php444,000 Answer not given

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017, and (c) 2018. NI(2016) WC(2016) RE(2016) NI(2017) WC(2017) RE(2017) UBal 200,000 180,000 200,000 160,000 260,000 360,000 a ( 30,000) ( 30,000) ( 30,000) ( 6,000) ( 36,000) ( 36,000) b 20,000 20,000 20,000 10,000 30,000 30,000 c 12,000 12,000 12,000 d. 150,000 150,000 ( 50,000) 100,000 e. ( 12,000) ( 12,000) ( 12,000) f. ( 15,000) ( 15,000) 5,000 ( 10,000) ------------------------------------------------------------------------------------------------------325,000 170,000 325,000 119,000 254,000 444,0000 =========================================================== Errors were discovered in 2016 a. Insurance expense Prepaid insurance b. Unearned rent revenue Rent revenue c. Accumulated depreciation

30,000 30,000 20,000 20,000 12,000

d.

Depreciation expense Building improvements Repairs expense

200,000

12,000 200,000...