Correction of Errors PDF

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TESTBANKCORRECTION OF ERRORSSubmitted by:Cantoria, GaebrieleLa Rosa, Karina YsabelleMayangitan, Jan VincentValera, Marian JoyceCORRECTION OF ERRORSMultiple Choice QuestionsProblem 1Timm Company failed to recognize accruals and prepayments since the inception of its business three years ago. The earn...

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TESTBANK CORRECTION OF ERRORS

Submitted by: Cantoria, Gaebriele La Rosa, Karina Ysabelle Mayangitan, Jan Vincent Valera, Marian Joyce

CORRECTION OF ERRORS

Multiple Choice Questions Problem 1 Timm Company failed to recognize accruals and prepayments since the inception of its business three years ago. The earnings before tax, accrual and prepayments at the end of the current year are: Earnings before tax Prepaid insurance Accrued wages Rent revenue collected in advance Interest receivable

P 1,400,000 20,000 25,000 30,000 50,000

1. The corrected earnings before tax should be a. P 1,385,000

c. P 1,400,000

b. P 1,415,000

d. P 1,375,000

Problem 2 You were engaged by Lanao Company to audit its financial statements for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end of 2009 and 2010. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: a. Salaries payable b. Interest receivable c. Prepaid insurance d. Advances from customers (Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year) e. Machinery (Capital expenditures had been recorded as repairs but should have been charged to Machinery; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%)

12/31/2010 780,000 213,000 307,800 561,000

12/31/09 873,600 259,200 384,000 470,400

522,000

564,000

2. What is the next effect of the errors on the 2009 profit? a. Understatement of P 775,800 b. Overstatement of P 165,000

c. Understatement of P 1,236,600 d. Overstatement of P 80,400

3. What is the net effect of the errors on the 2010 profit? a. Understatement of P 376,500 b. Overstatement of P 324,300

c. Understatement of P 320,100 d. Overstatement of P 380,700

4. What is the net effect of the errors on the balance of the company’s retained earnings at Dece,ber 31, 2010? a. Understatement of P 155,100 b. Overstatement of P 930,900

c. Understatement of P 265,800 d. Understatement of P 855,900

Problem 3 BARBADOS, INC. has been using the accrual basis of accounting. However, an examination of the records reveals that some expenses and revenues have been handled on a cash basis by the inexperienced bookkeeper of the company. Income statements prepared by the bookkeeper reported ₱145,000 net income for 2013 and P185,000 net income for 2014. Further review of the records reveals that the following items handled improperly. 

Rent of P6,500 was received from a lessee on December 23, 2013. It was recorded as income at that time even though the rental pertains to 2014.



Salaries payable on December 31 have been consistently omitted from the records of the date and have been recorded as expenses when paid in the following year. The salary accruals recorded in this manner were: P5,500 7,500 4,700

December 31, 2012 December 31, 2013 December 31, 2014 

Invoices for the office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored, and no entry has been made for them. December 31, 2012 December 31, 2013 December 31, 2014

P6,500 3,700 7,100

5. What is the corrected net income for 2013? a. P 133,700 b. P 144,200

c. P 146,700 d. P 139,300

6. What is the corrected net income for 2014? a. P 184,700 b. P 197,700

c. P 185,600 d. P 190,900

Problem 4 The condensed income statement of SURINAME, INC. for the year ended December 31, 2014, is presented below: Suriname, Inc. INCOME STATEMENT For the Year Ended December 31, 2014 ₱1,000,000 Sales Cost of goods sold 600,000 Gross income 400,000 Operating expenses 150,000 Net Income ₱ 250,000 The December 31, 2014, audit of the company’s financial statements disclosed the following errors: 

December 31, 2014, inventory understated ₱31,000.



Accrued expenses ₱4,000 and prepaid expenses of ₱6,000 were not recognized in the company’s books.



Sales of ₱5,000 were not recorded until January 2015, although the goods were shipped December 2014, and were excluded from the December 31 physical inventory.



Purchases of ₱30,000 made in December 2014, were not recorded although the goods were received and properly included in the December 31 physical inventory.



A machine was sold for ₱10,000 on July 1, 2014, and the proceeds were credited to the Sales account. The machine was acquired on January 1, 2011, for ₱60,000. At that time, it had an estimated life of 6 years with no residual value. No depreciation was recorded on this machine in 2014.

7. What is the corrected net income for the year ended December 31, 2014? a. P 228,000 b. P 166,000

c. P 258,000 d. P 224,000

Problem 5 The December 31 year-end financial statements of SAMOA COMPANY contained the following errors: Dec. 31, 2013

Dec. 31, 2014

Ending inventory 0verstated Depreciation expense

P 48,000 understated

P 40,500

P 11,500 understated

--------

An insurance premium of P330,000 was prepaid in 2013 covering the years 2013, 2014, and 2015. The entire amount was changed to expense in 2013. In addition, on December 31, 2014, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2015. There were no other errors during 2013 and 2014, and no corrections have been made for any of the errors. Ignore income tax defects. 8. What is the total effect of the errors on Samoa’s 2014 net income? a. Overstatement of P 123,500 b. Overstatement of P 27,500

c. Understatement of P 192,500 d. Understatement of P 177,500

9. What is the total effect of the errors on the amount of Samoa’s working capital at December 31, 2014? a. Overstatement of P 75,500 b. Overstatement of P 40,500

c. Understatement of P 225,500 d. Understatement of P 144,500

10. What is the total effect of the errors on the balance of Samoa’s retained earnings at December 31, 2014? a. Understatement of P 156,000 b. Overstatement of P 87,000

c. Understatement of P 133,000 d. Understatement of P 85,000

Problem 6 In 2014, Cremas Company discovered that equipment purchased on January 1, 2012 for P600,000 was expensed at that time. The equipment should have been depreciated over 5 years with no residual value. 11. What is the effect of the error on the retained earnings at January 1, 2014? a. Understatement of P 360,000 b. Understatement of P 240,000

c. Overstatement of P 360,000 d. Understatement of P 480,000

Problem 7 CHILE CO. reported pretax income of ₱505,000 and ₱387,000 for the years ended December 31, 2013 and 2014, respectively. However, the auditor noted that the following errors had been made:

A. Sales for 2013 included amounts of ₱191,000 which had been received in cash during 2013, but for which the related goods were shipped in 2014. Title did not pass to the buyer until 2014. B. The inventory on December 31, 2013, was understated by ₱43,200. C. The company’s accountant, in recording interest expense for both 2013 and 2014 on bonds payable, made the following entry on an annual basis: Interest expense

75,000

Cash

75,000

The bonds have a face value of ₱1,250,000 and pay a nominal interest rate of 6%. They were issued at a discount of ₱75,000 on January 1, 2013, to yield an effective interest rate of 7%. D. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2013 and 2014. Repairs of ₱42,500 and ₱47,000 had been incurred in 2013 and 2014, respectively. In determining depreciation charges, Chile applies a rate of 10% to the balance in the Equipment account at the end of the year. 12. What is the corrected pretax income for 2013? a. P 303,200 b. P 225,300

c. P 311,700 d. P 307,450

13. What is the corrected pretax income for 2014? a. P 488,992 b. P 480,042

c. P 484,292 d. P 575,392

Problem 8 Bakekz Company showed income before income tax of P6,500,000 on December 31, 2010. The year-end verification of the transactions of the company revealed the following errors:  



P1,000,000 worth of merchandise was purchased in 2010 and included in the ending inventory. However, the purchase was recorded only in 2011. A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-end. Since the merchandise was still at the port area, it was inadvertently omitted from the inventory balance of December 31, 2010. Advertising for December 2010, amounting to P500,000, was recorded when payment was made by the firm in January 2011.

 

Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2010. The entire amount was reported as income in 2010. Insurance premium covering the period from July 1, 2010 to July 1, 2011, amounting to P200,000 was paid and recorded as expense on July 31, 2010. The entity did not make any adjustment at the end of the year.

14. The correct income before tax for 2010 should be a. P 6,900,000 b. P 6,400,000

c. P 6,500,000 d. P 6,300,000

15. What was the effect of the errors on the total liabilities at December 31, 2010? a. Understatement of P 1,500,000 1,000,000 b. Understatement of P 1,200,000 1,700,000

c. Understatement of P d. Understatement of P

Problem 9 You were engaged in for the first time to audit the financial statement of Vivar Corporation for the period ended December 31, 2016. The company started its operation in 2014. In reviewing the books, the auditor discovered that certain adjustments had either been overlooked or improperly recorded at the end of year to 2016. Omissions and other failures for each year summarized below:

2014 1. Omissions of the following year-end accruals/deferrals: a. Accrued utilities expense b. Accrued interest income c. Prepaid rent expense d. Unearned royalty income 2. Delivery of merchandise at year-end from suppliers, recorded as sales upon collection the following year. 3. Receipt of merchandise at year-end from suppliers, recorded as purchases upon payment the following year. 4. Cash received from customers at year-ends, recorded as sales, deliveries yet to be made the following year. In the year of collection, corresponding inventories at cost were included in the physical count. 5. Payments to suppliers at year-end for goods to be received the following year, under FOB

December 31 2015

2016

5,000 2,000 8,000

7,000 4,000 2,000 -

6,000 3,000 1,000 3,000

5,000

-

10,000

6,000

3,000

-

5,000

2,000

1,000

3,000

Destination, recorded as purchases upon payment. Inventories were included in physical count at the year when these were received. 6. Overstatement in year-end inventories 7. understatement in year-end inventories 8. Organization costs incurred in the start-up of the business at the beginning of 2014 was capitalized by the company as an intangible asset and has been amortized for 5 years 9. Major repairs on the company’s equipment were recognized as outright expenses. The company depreciates equipment at 20% per annum, but depreciation in the year of the expenditure is at 10%

9,000

4,000

7,000 -

50,000

-

-

-

35,000

40,000

2016 1,001,00 0 460,000 150,000

The company’s books also revealed the following information:

Accumulated Profits

2014 235,000

2015 691,000

Profit Dividend declared and distributed

345,000 110,000

586,000 130,000

16. Adjusted profit for 2014? a. 287,000 b. 644,500

c. 491,000 d. 691,500

17. Adjusted profit for 2015? a. 287,000 b. 644,500

c. 491,000 d. 691,500

18. Adjusted profit for 2016? a. 287,000 b. 644,500

c. 491,000 d. 691,500

Problem 10 You were assigned to audit the financial statements of Rhea Corp. for the first time for the period ended December 31, 2016. In line with your audit, the following information were made available:

a. A collection for rental amounting to P45,000 of one of its idle properties covering the period July 1, 2015 to June 30, 2016 was received and recorded as rent income in July 1, 2015. b. the following were consistently omitted at each year-end. 2014 Salaries Payable 5,000 Unused Office supplies 5,400 Accrued royalty income 4,000

2015 3,600 9,000 7,900

2016 9,900 6,100 5,400

c. The following deliveries were made to customers at each year-end but were recorded as sales only upon cash collection the following year. All sales were made FOB Shipping Point and the related inventories were included in the physical count conducted ever December 31: 2014 2015 2016 Sales price 28,000 30,000 22,000 Cost of goods 15,400 17,400 13,200 d. A major repair cost improving the operating efficiency of an equipment was incurred at the beginning of 2014. The cost amounting to P55,000 was recognized as an outright repairs and maintenance expense. The equipment was acquired on January 2010 with a total useful life of 15 years. e. Dividend amounting to P120,000 was declared on December 20, 2016 to stockholders as of the same date and were recorded upon payment the following year January 20, 2017. f. the general ledger of the company’s accumulated profits account contained the following information: Date Particulars Debit Credit 1/1/14 Balance 625,400 1/3/14 Excess over par for ordinary shares issued 120,000 12/31/1 Net loss for the year 177,400 4 1/5/15 FMV of land donated by majority stockholder 480,000 12/31/1 Net income for the year 214,300 5 1/3/16 Cash dividend payment, declared 12/20/15 90,000 12/30/1 Loss on sale of an equipment 22,000 6 12/31/1 Net income for the year 421,700 6 12/31/1 Balance 1,571,50 6 0

19. What is the adjusted net loss for 2014? a. (95,900) b. (110,900)

c. (95,500) d. (115,900)

20. What is the adjusted net income for 2015? a. 218,700

c. 191,200

b. 198,200

d. 196,200

21. What is the correct retained earnings ending balance 2016? a. 901,900 b. 924,400

c. 1,021,900 d. 956,900

22. What is the effect of the errors to the 2016 working capital? a. 109,600 overstated b. 96,500 overstated

c. 10,400 understated d. 23,600 understated

Problem 11 You were engaged by MONSTA X Corp. to audit its financial statements for the first time. You discovered that certain adjustments had been overlooked at the end of 2013 and 2014. Moreover, you also discovered that some items had been omitted or erroneously recorded. The said omissions and other failures for each year are noted below: a. Prepaid insurance b. Accrued salaries and wages c. Accrued interest income d. Advances from customers e. Capital expenditures charged as expense

2013 256,000 582,400 172,800 313,600 376,000

2014 205,200 520,000 142,000 374,000 348,000

Audit notes: a. Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year. b. Capital expenditures had been recorded as repairs but should have been charged to the Machinery account; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%.

Based on the above and the result of your audit, answer the following: 23. What is the total effect of the errors on the 2014 net income? a. Understated by 251,000 b. Overstated by 216,200

c. Understated by 213,400 d. Overstated by 253,800

24. What is the effect of the errors on the company's working capital as of December 31, 2014? a. Understated by 202,200 b. Overstated by 79,600

c. Understated by 177,200 d. Overstated by 546,800

25. If remained unadjusted, what will be the effect of the errors to the company's December 31, 2014 accumulated profits? a. Understated by 103,400 b. Overstated by 620,600

c. Understated by 177,200 d. Overstated by 579,600

Problem 12 WannaOne Co.'s net income for 2012, 2013 and 2014 were P100,000, P145,000 and P 185,000; respectively. The following items were not handled properly. a. Rent of P6500 for 2015 was received from a lessee on December 23, 2014, and recorded as outright income in 2014. b. Salaries payable at the end of the following years were omitted: December 31, 2011

P2,500

December 31, 2012

P5,500

December 31, 2013

P7,500

December 31, 2014

P4,700

c. The following unused office supplies were omitted in the accounting records: December 31, 2011

P3,500

December 31, 2012

P6,500

December 31, 2013

P3,700

December 31, 2014

P7,100

d. On January 1, 2012, the company completed major repairs on the company's machinery and equipment totaling P220,000, which was expensed outright. The said equipment has remaining useful life of 5 years as of January 1, 2012. As of December 31, 2014, the equipment had an original cost of P500,000 and book value of P250,000.

26. The corrected net income for year 2012 is: a. 80,000 b. 234,000

c. 240,000 d. 300,000

27. The corrected net income for year 2013 is: a. 113,700 b. 120,200

c. 126,700 d. 139,300

28. The corrected net income for year 2014 is: a. 184,700 b. 170,900

c. 165,600 d. 164,700

29. The effect of the above errors on the beginning of 2014 beginning retained earnings is: a. 176,200 under b. 136,200 under

c. 116, 200 under d. 3,800 over

30. The effect of the above errors on 2014 working capital is: a. 4,100 under b. 4,100 over

c. 8,900 under d. 8,900 over

Long Problems Problem 1 Criselle Company began operations on January 1, 2009. Financial statements for the years 2009 and 2010 contained the following errors: Ending inventory Depreciation Insurance expense Prepaid insurance

P P P P

2009 800,000 under 150,000 under 50,000 over 50,000 under

2010 P 400,000 over P 50,000 under

In addition, on December 31, 2010, a fully depreciated equipment was sold for P100,000 cash but the sale was not recorded until 2011. Ignoring income tax, what is the total effect of the errors on: 1. Net income for 2009? 2. Net income for 2010? 3. Working capital on December 31, 2010? 4. Retained earnings on January 1, 2010? 5. Retained earnings on December 31, 2010?

Problem 2 The following information pertains to VANUATU COMPANY’s depreciable assets: 





Machine X was purchased for ₱150,000 on January 1, 2009. The entire cost expensed in the year of acquisition. The estimated useful life of this machine is 15 years with no residual value. Machine Y cost ₱525,000 and was acquired on January 1, 2010. On the acquisition date, the expected useful life was 12 years with no residual value. The straight-l...