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CORRECTION OF ERRORS Stratton Company has determined its 2014 and 2015 net income figures to be P1,500, and P1,100,000, respectively. In a first time audit of the company’s financial statements, you determined the following errors: a) Merchandise inventory was incorrectly determined: P50,000 oversta...

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CORRECTION OF ERRORS

1. Stratton Company has determined its 2014 and 2015 net income figures to be P1,500,000 and P1,100,000, respectively. In a first time audit of the company’s financial statements, you determined the following errors: a) Merchandise inventory was incorrectly determined: P50,000 overstatement for 2014 and P150,000 overstatement for 2012. b) Revenue received in advance in 2014 of P250,000 was credited to a revenue account when received. Of the total. P50,000 was earned in 2014, P120,000 was earned in 2015 and the remainder will be earned in 2013. c) P120,000 gain on sale of plant assets in 2015 was erroneously credited to Accumulated Profits and Losses. What is the corrected net income for the year 2015? P1,240,000 Net income for 2015 a) Overstatement of 2014 inventory Overstatement of 2015 inventory b) Understatement of revenue for 2015 c) Gain on sale-2015 not recognized in net income Correct net income

P1,100,000 50,000 ( 150,000) 120,000 `120,000 P1,240,000

2. Vinn Company reported an Accumulated Profits and Losses balabce of P300,000 at December 31,2014. In June 2015, Vinn discovered that merchandise costing P100,000 had not been included in inventory in its 2014 financial statements. Assume Vinn has 32% tax rate. What amount should Vinn report as adjusted beginning Accumulated Profits and Losses on January 1, 2015? P368,000 Accumulated profits, December 31, 2014, or January 1, 2015 Understatement in inventory for 2014 P100,000 x Net of tax rate x 68% Adjusted accumulated profits, January 1, 2015

P300,000 68,000 P368,000

3. Casper Company reported an Accumulated Profits balance of P400,000 at December 31,2014. In August 2015, Casper Company determined that insurance premiums of P75,000 for the three-year period beginning January 1, 2014, had been paid and fully expensed in 2014. Assume Casper has a 32% income tax rate. What amount should Casper report as adjusted beginning Accumulated Profits in 2015? P434,000 Accumulated profits, December 31, 2014 Overstatement of expense

P400,000 P50,000

x Net of tax rate Adjusted accumulated profits, January 1, 2015

x 68%

34,000 P434,000

4. Oakman Company started operations on January 1, 2011. Financial statements for 2014 and 2015 contained the following errors:

Ending inventory Depreciation expense Insurance expense Prepaid insurance

December 31, 2014 P55,000 too high 35,000 too high 25,000 too low 25,000 too high

December 31, 2015 P65,000 too low 25,000 too high -

Additionally, a fully depreciated equipment was sold for P12,000 on December 31, 2015. The sale was not recorded until 2016. No corrections have been made for any of the errors. (Ignore income tax considerations) How much would be the total effect of the errors in Oakman’s 2015 net income? Understated by P157,000

Ending inventory: 2014 too high 2015 too low Depreciation-2014 too high Insurance expense-2014 too low Unrecorded gain Effect on net income

2014

2015

(P55,000)

P 55,000 65,000

35,000 ( 25,000) ________ (P45,000)

25,000 12,000 P157,000

How much would be the understatement in Oakman’s Accumulated Profits balance at December 31, 2015? P112,000 Effect on 2014 net income Effect on 2015 net income Net effect on December 31, 2015 Accumulated Profits

(P 45,000) 157,000 P 112,000

5. On December 30,2014, Mazu Corporation sold merchandise for P75,000 to Nhoreen Company. The terms of the sale were n/30, FOB shipping point. The merchandise was shipped on December 31, 2014, and arrived at Nhoreen Company on January 2, 2015 and the merchandise, sold at 25% markup on coast, was included in Mazu’s inventory at December 31, 2014. As a result, Mazu cost of goods sold for the year ended December 31, 2014 was? Understated by P60,000 The December 31, 2014 inventory was overstated. Therefore, cost of goods sold for 2014 was understated bu P60,000 (P75,000 / 125%)

6. Star Company’s December 31 year-end financial statements had the following errors:

Ending inventory Depreciation expense Unearned rental Prepaid insurance

December 31, 2014 P13,500 understated 3,600 understated 5,000 understated

December 31, 2015 P19,800 overstated 8,000 understated

There was no other errors during the years 2014 or 2015 and no corrections have been made for any of the errors. (Ignore income tax consideration) What is the net effect of the errors on Star’s 2015 net income? Overstated by P20,300 Effect on December 31, 2015 Accumulated Profits

Net Income 2014 2015 Ending inventory: 2014-understated 2015-overstated Depreciation-2014 under Unearned rental-2014 under Prepaid insurance-2015 under Net effect (over) understated

P13,500 ( 3,600) ( 5,000) _______ P 4,900

(P13,500) ( 19,800) 5,000 8,000 (P20,300)

P 0 ( 19,800) ( 3,600) 8,000_ (P15,400)

What is the net effect of the errors in Star’s December 31, 2015 accumulated profits balance? Understated by P8,000 What is the net effect of the errors in Star’s December 31, 2015 working capital? Overstated by P11,800

2015 overstatement of inventory 2015 understatement of prepaid insurance Net effect on the working capital (over)

7.

Effect on Working Capital (for 2015) (P19,800) 8,000 (P11,800)

Records showed that as of December 31, 2014, accrued salaries payable of P21,000 were not recorded in Sebby Company’s books. In addition, office supplies on hand of P9,000 at December 31, 2015 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. What is the effect of these two errors? 2015 net income is understated by P30,000 and January 1, 2016 accumulated profits is understated by P9,000.

Unrecorded accrued salaries in 2014

Accumulated Net Income Profits 2014 2015 January 1, 2016 (P21,000) P21,000 P 0

Office supplies on hand in 2015 charged to expense Net effect – (overstated) understated

________ (P21,000)

9,000 P30,000

9,000 P9,000

8. Isay Corporation started operations on January 1, 2014. Financial statements for the years ended December 31, 2014 and 2015 contained the following errors:

Ending inventory Depreciation expense Insurance expense Prepaid insurance

2014 P240,000 understated 90,000 understated 150,000 overstated 150,000 understated

2015 P225,000 overstated 150,000 understated

Additionally, a fully depreciated equipment was sold for cash of P162,000 on December 31, 2015. The sale was not recorded until 2016. There were no other errors during 2014 or 2015 and no corrections have been made for any of the errors. What is the total effect of the errors in the amount of the working capital at December 31, 2015? (ignore income taxes) Overstated by P63,000

Inventory-2014 under Inventory-2015 over Depreciation-2014 under Prepaid insurance under Gain on sale of equipment Net correction

2014 P240,000 ( 90,000) 150,000 ________ P300,000

2015 (P240,000) ( 225,000) 0 ( 150,000) 162,000 (P453,000)

Working Capital Dec. 31, 2015 (P225,000) 0 0 162,000 (P 63,000)

9. While examining the accounts of Yo Mama Company on December 31, 2015, the following errors were uncovered: a) Dividends of P100,000 had been declared on December 15, 2015 but was not recorded in the books. b) Improvements in buildings and equipment for P480,000 had been debited to expense at the end of April in 2014. Improvements are estimated to have an estimated life of 8 years. c) The company failed to record sales commissions payable amounting to P10,500 and P19,000 at the end of 2014 and 2015, respectively. d) Supplies on hand amounting to P6,000 and P15,000 were not recognized at the end of 2014 and 2015, respectively. What is the net effect of the above errors in the 2014 net income? P435,500 under What is the neteffect of the error in the 2015 net income? P59,500 over

a) Unrecorded dividends b) Leasehold improvements charged to expense understatement of depreciation 2014 (P480,000 / 8 x 8/12) 2015 (P480,000 / 8) c) Unrecorded sales commissions 2014 2015 d) Unrecorded supplies on hand 2014 2015 Net effect

No effect

No effect

P480,000 under 40,000 over P60,000 over 10,500 over

6,000 under _____________ P435,500 under

10,500 under 19,000 over 6,000 over 15,000 under P59,500 over

10. The following errors were discovered in the course of examination of the Doodle Company’s financial records: o Year 2014 wages payable for P34,000 was not recorded. o Accrued vacation pay for the year 2014 for P62,500 was not recorded because the bookkeeper “never learned that you had to do it”. o Insurance for a 12-month period purchased on November 1, 2014 was charged to expense in the amount of P37,200 because “the amount of the check is about the same every year”. What is the net effect of the above errors on the January 1, 2015 accumulated profits? P65,500 over

Unrecorded wages payable Accrued vacation pay for 2014 not recorded Overcharging of insurance expense during 2014 (P37,200 x 10/12) Net effect on the 1/1/15 Accumulated Profits

Accumulated Profits Jan. 1, 2015 Under (Over) (P34,000) ( 62,500) 31,000 (P65,500)

11. Porpol Company discovered the following errors in its financial records at the beginning of the year 2015: a) The physical inventory count on December 31, 2014 excluded a merchandise with a cost of P38,000 that had been temporarily stored in a public warehouse. Porpol uses the periodic inventory system. b) During 2014, a competitor filed a patent infringement suit against Porpol claiming damages of P440,000. The company’s legal counsel hasindicated that an unfavorable verdict is probable and a reasonable estimate of the court’s award to the competitor is P250,000. The company has not reflected or disclosed this situation in the financial statements. c) A trademark was acquired at the beginning of 2013 for P100,000. No amortization has been recorded since acquisition. It is the company’s policy to amortize all intangibles

with a definite life for a maximum of 20 years. At the time of acquisition, the trademark was estimated to have a definite life of 20 years. What is the effect of the above errors on the January 1, 2015 accumulated profits? P222,000 overstated Accumulated Profits, January 1, 2015 Under (Over) P 38,000

a) Company’s inventory, excluded in the physical count b) Failure to recognize a probable & reasonable amount of estimated loss c) Failure to amortize trademarks (P100,000 / 20 x 2) Net effect

(250,000) ( 10,000) (P222,000)

12. While examining the December 31, 2014 financial statements of Sunrise Company, you discovered the following: a) Inventory at January 1, 2014 had been overstated by P30,000 b) Inventory at December 31, 2014 was understated by P50,000 c) During 2014, Sunrise received a P100,000 cash advance from a customer for merchandise to be manufactured and shipped during 2014. The amount was credited to sales revenue. d) The net income reported on the 2014 profit or loss before reflecting any adjustments for the above items is P3,000,000 What is the corrected net income for the year ended December 31, 2014? P2,980,000 Reported net income a) Overstatement of 1/1/14 inventory b) Understatement of 12/31/14 inventory c) Sales for 2015 recognized in 2014 Correct net income, 2014

P3,000,000 30,000 50,000 ( 100,000) P2,980,000

13. Bonjoy Corporation failed to recognize accruals and prepayments since the inception of its business three years ago. The accruals and prepayments at the end of 2014 are given below: Prepaid insurance Accrued wages Rent revenue collected in advance Interest receivables

P60,000 75,000 96,000 81,000

What is the net effect of the above errors in the 2014 net income? P30,000 overstated Effect on Net Income Understated (Overstated) Understatement of prepaid insurance P 60,000 Understatement of accrued wages ( 75,000) Understatement of rent revenue collected in advance ( 96,000)

Understatement of interest receivables Overstatement of net income

81,000 (P30,000)

14. Maan Company had the following financial statement information:

Revenue Expenses Net income

2012 1,350,000 980,000 370,000

2011 1,000,000 650,000 350,000

Total assets Total liabilities Total owner’s equity

12/31/2012 1,570,000 500,000 1,070,000

12/31/2011 1,050,000 350,000 700,000

Maan failed to record P120,000 of accrued wages at the end of 2011. The wages were recorded and paid in January 2012. The correct accruals were made on December 31, 2012. What is the corrected net income for 2011? 230,000 Net income for 2011 Unrecorded accrued wages – December 31, 2011 Corrected net income for 2011

350,000 (120,000) 230,000

15. What is the corrected net income for 2012? 490,000 Net income for 2012 Accrued wages on 12/31/2011 recorded in 2012 Corrected in net income for 2012

370,000 120,000 490,000

16. What is the correct amount of total liabilities on December 31, 2011? 470,000 Total liabilities – December 31, 2011 Unrecorded accrued wages – December 31, 2011 Correct amount of total liabilities – December 31, 2011

350,000 120,000 470,000

17. What is the correct amount of owner’s equity on December 31, 2012? 1,070,000 Total owner’s equity – December 31, 2012

1,070,000

18. Erich Company manufactures kerosene heaters for home use. The December 31 financial statements contained the following error:

Ending inventory

2010 200,000 under

2011 300,000 over

Depreciation

50,000 under

An insurance premium of P150,000 was prepaid in 2010 to cover 2010, 2011 and 2012. The entire amount was charged to expense in 2010. On December 31, 2011, fully depreciated machinery was sold for P250,000 cash but the sale was not recorded until 2012. There were no other errors during 2010 and 2011 and no corrections have been made for any of the errors. Ignoring income tax, what is the net effect of the errors on the retained earnings on December 31, 2011? 50,000 overstated

2010 ending inventory under 2011 ending inventory over 2010 depreciation under Insurance premium Gain on sale of machinery Net correction to income

200,000 ( 50,000) 100,000 --- _ 250,000

Net correction to 2010 net income Net correction to 2011 net income Net correction to retained earnings

(200,000) (300,000) --( 50,000) 250,000_ (300,000) 250,000 (300,000) ( 50,000)

19. Bayle Company is in the process of adjusting its books at the end of 2011. Bayle’s records revealed the following information:  Bayle failed to accrue sales commissions at the end of 200 and 2010 as follows: 2009 2010

220,000 140,000

In each case, the sales commissions were paid and expensed in January of the following year.  Errors in ending inventory for the last three years were discovered to be as follows: 2009 2010 2011

400,000 understated 540,000 overstated 150,000 understated

The unadjusted retained earnings balance on January 1, 2011 is P12,600,000 and the unadjusted net income for 2011 was P3,000,000. Dividends of P1,750,000 were declared during 2011. What is the adjusted net income for 2011? 3,830,000

2009 Unrecorded commissions:

2010

2011

2009 2010 Ending inventory: 2009 under 2010 over 2011 under Net correction to income

(220,000)

400,000 _______ 180,000

Net income per book for 2011 Net correction to income of 2011 Adjusted net income of 2011

220,000 (140,000)

140,000

(400,000) (540,000) ________ (860,000)

540,000 150,000 830,000

3,000,000 830,000 3,830,000

20. What is the adjusted balance of retained earnings on December 31, 2011? 14,000,000 Net correction to income of 2009 Net correction to income of 2010 Net correction to income of prior years Retained earnings – January 1, 2011 Prior period errors Corrected beginning balance Net income for 2011 Dividends declared in 2011 Retained earnings – December 31, 2011

( (

180,000 860,000) 680,000)

12,600,000 ( 680,000) 11,920,000 3,830,000 ( 1,750,000) 14,000,000

ACCRUAL & CASH BASIS OF ACCOUNTING 1. Yord Company reported revenue of P6,000,000 under the cash basis for the year ended 2014. Additional information was made available: Accounts receivable, December 31, 2013 Accounts receivable, December 31, 2014

P1,250,000 1,375,000

Under the accrual basis, how much should Yord Company report as revenue for 2014? P6,125,000 Cash basis revenue Accounts receivable, 12/31/2014 Accounts receivable, 12/31/2013 Accrual basis revenue

P6,000,000 1,375,000 ( 1,250,000) P6,125,000

2. Dream Company reported total purchases of P2,500,000 in its cash basis financial statement on December 31, 2014. Additional information revealed the following: Accounts payable, January 1, 2014 Accounts payable, December 31, 2014

P 600,000 800,000

Under the accrued basis of measuring revenues and expenses, how much is the total purchases for the year ended December 31, 2014? P2,700,000 Purchases – Cash basis Accounts payable, 12/31/2014 Accounts payable, 01/01/2014 Purchases – Accrual basis

P2,500,000 800,000 600,000 P2,700,000

3. Elsa Company’s professional fees expense account had a balance of P164,000 on December 31, 2014 before considering year-end adjustments relating to the following: Consultants were hired for a special project at a total fee not to exceed P130,000. Elsa has recorded P110,000 of this fee based on billings for work performed in 2014 The attorney’s letter requested by the auditors dated January 30, 2014 indicated that legal fees of P12,000 were billed on January 15, 2015 for work performed in November 2014 and unbilled fees for December 2014 were P14,000. What amount of professional fees expense should Elsa report for the year ended December 31, 2014 profit or loss? P190,000 Professional fees per book Accrued legal fees – November December Adjusted professional fees

P164,000 P12,000 14,000

24,000 P190,000

4. In 2009, Leon Designs Corporation sold a layout design to Laica Inc. and will receive royalties of 20% of future revenues associated with the said layout design. On December 31, 2013, Leon Designs reported royalties receivables of P75,000 from Laica Inc. during 2014, Leon Designs received royalty payments of P200,000. Laica Inc. reported revenues of P1,500,000 in 2014 from the layout design. In its 2014 profit or loss, what amount should Leon Designs report as royalty revenue? P300,000 Reported revenue x royalty rate Royalty revenue

P1,500,000 x 20% P 300,000

5. To maintain sufficient operating cash, Infinity Company frequently borrows from a bank. Below is the summary of loans granted to Infinity with 12% interest rate. The principal and the related

interest are payable at maturity and Infinity was able to repay the loans on scheduled maturity date: Date of Loan November 1, 2013 February 1, 2014 May 1, 2014

Amount P300,000 900,000 480,000

Maturity Date October 31, 2014 July 31, 2014 January 31, 2015

Term of Loan 1 year 6 months 9 months

Infinity records interest expense when the loans are repaid. Accordingly, interest expense of P90,000 was recorded in 2014. If no correction is made, by what amount...