Chapter 2 Caselette Correction of Errors PDF

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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, unadjusted trial valance showed a balance of P270 for prepaid insurance and P13,230 for insurance expense. What amounts should ...

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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 Supplies expense

xxxx

a. To recognize supplies used, if purchases of supplies are recorded in supplies. b. To recognize supplies on hand, if purchases of supplies are recorded in supplies expense.

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c. To record the purchase of supplies during or at the end of the period. d. To close the expense account for supplies at the end of the period. 5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry could be made on January 1? a. Wages expense 15,000 Wages payable 15,000 b. Prepaid expense 15,000 Wages expense 15,000 c. Wages expense 15,000 Prepaid wages 15,000 d. Wages payable 15,000 Wages expense 15,000 6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance was debited. Assuming a December 31 year-end, what is the reversing entry at the beginning of the next period? a. None is required. b. Cash 6,000 Prepaid insurance 6,000 c. Prepaid insurance 5,500 Insurance expense 5,500 d. Insurance expense 500 Prepaid insurance 500 7. A consulting firm started and completed a project for a client in December 2006. The project has not been recorded on the consulting firm’s books, and the firm will not receive payment from the client until February 2007. The adjusting entry that should be made on the books of the consulting firm on December 31, 2006, the last day of the firm’s fiscal year, is a. Cash in transit xxx Consulting revenue xxx b. Consulting revenue receivable xxx Consulting revenue xxx c. Unearned consulting rev. xxx Consulting revenue xxx d. Consulting revenue receivable xxx Unearned consulting revenue xxx 8. Cristie Company sublet a portion of its warehouse for 5 years at an annual rental of P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Cristie recorded as a credit to calendar-year basis. The adjustment on December 31 of the first year should be a. No Entry. b. Unearned rental income 2,500 Rental income 2,500 c. Rental income 2,500 Unearned rental income 2,500 d. Unearned rental income 12,500 Rental income 12,500

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9. After a successful drive aimed at members of a specific national association, Online Company received a total of P180,000 for 3-year subscriptions beginning April 1, 2006, and recorded this amount in the unearned revenue account. Assuming Online records adjustment only at the end of the calendar year, the adjusting entry required to reflect the proper balances in the accounts at December 31, 2006 is to a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000. b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000. c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000. d. Debit unearned revenue for P45,000 and credit subscription revenue for P45,000. 10. Jay Corporation renewed an insurance policy for 3-years beginning July 1, 2006 and recorded the P81,000 premium in the prepaid insurance accounts. The P81,000 premium represents an increase of P23,400 from the P57,600 premium charged 3 years ago. Assuming Jay'’ records its insurance adjustments only at the end of the calendar year, the adjusting entry required to reflect the proper balances in the insurance accounts at December 31, 2006, Jay’s year-end is to a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500. b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500. c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500. d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100. 11. The 2006 financial statements of Hershey Company reported net income for the year ended December 31, 2006 of 2 million. On July 1, 2007, subsequent to the issuance of the 2006 financial statements, Hershey changed from an accounting principle that is not generally accepted to one that is generally accepted. If the generally accepted accounting principle had been used in 2006, net income for the year ended December 31, 2006 would have been decreased by 1 million. On August 1, 2007, Hershey discovered a mathematical error relating to its 2006 financial statements. If this error had been discovered in 2006, net income for the year ended would have been increased by P500,000. What amount, if any, should be included in net income for the year ended December 31, 2007 because of the items noted above? a. P 0 c. P 500,000 increase b. P 500,000 decrease d. P 1,000,000 decrease 12. Edcelle Company reported a retained earnings balance of P400,000 at December 31, 2005. In August 2006, Edcelle determined that insurance premiums of P60,000 for the 3-year period beginning January 1, 2005 had been paid and fully expensed in 2005. Edcelle has a 30% income tax rate. What amount should Edcelle report as adjusted beginning retained earnings in its 2006 statement of retained earnings? a. P 442,000 b. P 440,000 c. P 428,000 d. P 420,000 13. Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31, 2005 financial statements. In addition, a change from straight-line to accelerated depreciation made at the beginning of 2006 resulted in a cumulative effect of P30,000 on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related income taxes. What amount should Colasissi report as prior period adjustments in 2006? a. P 0 b. P 30,000 c. P 50,000 d. P 80,000

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Questions 14 and 15 are based on the following information. On October 1, 2006, Yuri Retailers signed a 4-month, 16% note payable to finance the purchase of holiday merchandise. At that date, there was no direct method of pricing the merchandise, and the note’s market rate of interest was 11%. Yuri recorded the purchase at the note’s face amount. All of the merchandise was sold by December 1, 2006. Yuri’s 2006 financial statements reported interest payable and interest expense on the note for 3 months at 16%. All amounts due on the note were paid February 1, 2007. 14. Yuri’s 2006 cost of goods sold for the holiday merchandise was a. Overstated by the difference between the note’s face amount and the note’s October 1, 2006 present value. b. Overstated by the difference between the note’s face amount and the note’s October 1, 2006 present value plus 11% interest for 2 months. c. Understated by the difference between the note’s face amount and the note’s October 1, 2006 present value. d. Understated by the difference between the note’s face amount and the note’s October 1, 2006 present value plus 11% interest for 2 months. 15. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?

a. b. c. d.

12/31/06 Retained earnings Yes No Yes No

12/31/06 Interest payable Yes No No Yes

16. On December 31, 2006, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The terms of the sale were net 30, FOB shipping point. The merchandise was shipped on December 31, 2006 and arrived at Fineafle on January 5, 2007. Because of a clerical error, the sale was not recorded until January 2007, and the merchandise, sold at 25% markup, was included in Excel’s inventory at December 31, 2006. As a result, Excel’s cost of goods sold for the year ended December 31, 2006 was a. Understated by P 75,000 c. Understated by P 15,000 b. Understated by P 60,000 d. Correctly stated 17. For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by workers during the last week of the year. The amounts omitted, which are considered material, were as follows: December 31, 2003 December 31, 2005 December 31, 2006

P56,000 51,000 64,000

The entry on December 31, 2006 to correct for these omissions would include a a. Credit to wage expense for P64,000 b. Debit to wage expense for P51,000 c. Debit to wage expense for P13,000 d. Credit to retained earnings for P64,000

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18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors made at December 31, 2006: Failed Failed Failed Failed

to to to to

accrue P50,000 interest expense record depreciation expense on office equipment of P80,000 amortize prepaid rent expense of P100,000 delay recognition of prepaid advertising expense of P60,000

The net effect of these errors was to overstate net income for 2006 by a. P 130,000 b. P 170,000 c. P 230,000 d. P 290,000 19. While preparing its 2006 financial statements, Falfact Corp. discovered computational errors in its 2005 and 2004 depreciation expense. These errors resulted in overstatement of each year’s income by P25,000, net of income taxes. The following amounts were reported in the previously issued financial statements: 2005 2004 Retained earnings, 1/1 P 700,000 P 500,000 Net income 150,000 200,000 Retained earnings, 12/31 P 850,000 P 700,000 Falfact’s 2006 net income is correctly reported at P180,000. Which of the following amounts should be reported as prior-period adjustments and net income in Falfact’s 2006 and 2005 comparative financial statements? Year a. 2005 2006 b. 2005 2006 c. 2005 2006 d. 2005 2006

Prior period adjustment P (50,000) (50,000) (25,000) -

Net income P150,000 180,000 150,000 180,000 125,000 180,000 125,000 180,000

20. The following information appeared on Blight Inc.’s December 31 financial statements: 2005 2006 Assets P 1,000,000 P1,200,000 Liabilities 750,000 800,000 Contributed capital 120,000 120,000 Dividends paid 100,000 60,000 In preparing its 2006 financial statements, Blight discovered that it had misplaced a decimal in calculating depreciation for 2005. This error overstated 2005 depreciation by P10,000. In addition, changing technology had significantly shortened the useful life of Blight’s computers. Based on this information, Blight determined that depreciation should be P30,000 higher in 2006 financial statements. Assuming that no correcting or adjusting entries have been made and ignoring income taxes, how much should Blight report as 2006 net income? a. P 230,000 b. P 210,000 c. P 180,000 d. P 170,000

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Questions 21 and 22 are based on the following information. An audit of Angelina Company has revealed the following four errors that have occurred but have not been corrected:    

Inventory at December 31, 2005-P40,000, understated Inventory at December 31, 2006-P15,000, overstated Depreciation for 2005-P7,000, understated Accrued expenses at December 31, 2006-P10,000, understated

21. The errors cause the reported net income for the year ending December 31, 2006 to be a. Overstated by P72,000 c. Understated by P28,000 b. Overstated by P65,000 d. Understated by P45,000 22. The errors cause the reported retained earnings at December 31, 2006 to be a. Overstated by P65,000 c. Overstated by P25,000 b. Overstated by P32,000 d. Understated by P18,000 23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to cash of P50,500 and notes receivable of P50,500. This error will a. Overstate the expenses by P500 b. Understate the liability by P500 c. Understate assets by P500 and understate revenue by P500 d. Understate revenue by P500 24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts payable and credit to cash for P23,000. The working capital a. Has no effect c. Is understated by P9,000 b. Is overstated by P9,000 d. Is understated by P23,000 25. The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one of its machines recorded as follows: Cash 270,000 Accumulated depreciation - machine 30,000 Machine 300,000 If the actual cash proceeds is P300,000, the correcting entry would be: a. Cash 300,000 Machine 300,000 b. Cash 30,000 Gain on sale of machine 30,000 c. Accumulated depreciation - machine 30,000 Gain on sale of machine 30,000 d. Cash 300,000 Machine 270,000 Gain on sale of machine 30,000 26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the error to the accounting elements, if not corrected, is a. P30,000 understatement of the net income. b. P30,000 understatement of asset and P30,000 understatement of net income. c. P30,000 understatement of asset and P30,000 understatement of owner’s equity. d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.

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27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when nominal accounts were already closed to income summary, but not yet closed to the capital account. The correcting entry will require a a. P2,700 debit to accounts receivable b. P2,700 debit to purchases c. P2,700 credit to purchases d. P2,700 credit to accounts payable 28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously recorded as P56,000. The error had been discovered when all nominal and temporary accounts were already closed to the real account. The correcting entry would require a a. Debit to capital account c. Credit to cost of sale b. Debit to income summary account d. Credit to owner’s capital 29. A sales discount of P5,000 was recorded as purchase discount. The error had been discovered when nominal accounts were still open. The correcting entry would require a a. P5,000 debit to purchase discount c. P5,000 credit to sales discount b. P5,000 credit to purchase discount d. P5,000 credit to accounts payable 30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries expense. The error had been discovered when all temporary accounts were already closed to the capital account. The correcting entry will require a a. P20,000 debit to owner’s capital c. P20,000 debit to salaries expense b. P20,000 debit to owner’s drawings d. No correcting entry is necessary 31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been discovered when nominal accounts were already closed. The correcting entry would require a a. P20,000 debit to rent expense c. P40,000 credit to rent income b. P20,000 debit to rent income d. No adjustment entry is necessary 32.A cash collection of P5,000 from customer’s open account was recorded as P500. The error had been discovered when nominal accounts were still open. The correcting entry would require a a. P4,500 debit to accounts receivable c. P500 credit to accounts receivable b. P4,500 debit to cash d. P500 credit to cash 33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had been discovered when nominal accounts were already closed. The correcting would require a a. P900 debit to cash. c. P900 debit to sale b. P900 debit to accounts receivable d. P900 credit to accounts receivable 34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit to cash P5,500 and credit to notes receivable P5,500. The error had been discovered when nominal accounts were still open. The correcting entry would require a a. P500 debit to cash. c. P500 credit to cash b. P500 debit to accounts receivable d. P500 credit to interest income

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35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with a face value of P100,000 was not taken up as of December 31, 2004. The collection of the note, which matured on January 31, 2007, was recorded as Cash 102,000 Notes receivable 100,000 Interest Income 2,000 The error was discovered after collection. The correcting entry would require a a. P2,000 debit to cash. b. P2,000 debit to accrued interest receivable c. P1,000 debit to interest income d. P2,000 credit to interest income 36.A return of merchandise amounting to P4,500 which was previously purchased on account was recorded as Accounts payable Purchases

5,400 5,400

If the error had been discovered when the nominal accounts were still open, the correcting entry would require a a. P900 debit to purchase return b. P900 debit to accounts payable c. P900 credit to purchases d. P900 credit to accounts payable

Answer: 1. c 2. a

3, d

4, b

5. d

6. a

7. b

8. d

9. d

10. d

11. d

12. c

13. c

14. a

15. d

16. b

17. c

18. b

19. a

20. c

21. b

22. b

23. c

24. a

25. b

26. c

27. b

28. c

29. b

30. d

31. d

32. b

33. b

34. d

35. c

36. d

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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 t...