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INTERMEDIATE ACCOUNTINGPROBLEM 16-Glory Company reported the following errors in the financial statements:2019 2020Ending inventory 200,000 under 300,000 over Depreciation 50,000 underAn insurance premium of P150,000 was prepaid in 2019 to cover 2019, 2020 and 2021. The entire amount was charged to ...

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INTERMEDIATE ACCOUNTING PROBLEM 16-9 Glory Company reported the following errors in the financial statements: 2019 Ending inventory Depreciation

2020

200,000 under 50,000 under

300,000 over

An insurance premium of P150,000 was prepaid in 2019 to cover 2019, 2020 and 2021. The entire amount was charged to expense in 2019. On December 31, 2020, fully depreciated machinery was sold for P250,000 cash but the sale was not recorded until 2021. There were no other errors during 2019 and 2020 and no corrections have been made for any of the errors. 1. What is the effect of the errors on 2019 net income? ANSWER: A a. 250,000 understated b. 250,000 overstated c. 350,000 understated d. 350,000 overstated 2019 ending inventory under 2019 depreciation under Insurance premium Net correction

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

2. What is the effect of the errors on 2020 net income? ANSWER: B a.300,000 understated b.300,000 overstated c.200,000 understated d.200,000 overstated

2019 2019 ending inventory under 2020 ending inventory over Insurance premium Gain on sale of machinery Net correction

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

3. What is effect of the errors on retained earnings on December 31, 2020?

ANSWER: C a. 300,000 overstated b. 250,000 understated c. 50,000 overstated d. 50,000 understated 2019 net correction – understated 2020 net correction – overstated Retained earnings overstated

250,000 (300,000) ( 50,000)

PROBLEM 16-10 Shannon Company began operations on January 1, 2019. The financial statement contained the following errors: 2019 2020 Ending inventory Depreciation expense Insurance expense Prepaid insurance

160,000 understated 60,000 understated 100,000 overstated 100,000 understated

150,000 overstated 100,000 understated

On December 31, 2019, fully depreciated machinery was sold for P108,000 cash but the sale was not recorded until 2020. No corrections have been made for any of the errors. Ignoring income tax, what is the total effect of the errors on. 1. Net income for 2019? ANSWER: A a. 200,000 over b. 200,000 under c. 260,000 under d. 0 2019 inventory understated 2019 depreciation understated 2019 prepaid insurance understated Net correction 2. Net income for 2020? ANSWER: A a. 302,000 over b. 302,000 under c. 410,000 over d. 410,000 under

160,000 ( 60,000) 100,000 200,000

2019 inventory understated 2020 inventory overstated 2019 prepaid insurance understated 2020 gain on sale of machinery Net correction

(160,000) (150,000) (100,000) 108,000 (302,000)

3. Retained earnings on December 31, 2020? ANSWER: A a. 102,000 over b. 102,000 under c. 200,000 over d. 200,000 under 2019 net correction 2020 net correction Retained earnings

200,000 (302,000) (102,000)

4. Working capital on December 31, 2020? ANSWER: A a. 42,000 over b. 58,000 under c. 60,000 under d. 98,000 under 2020 inventory overstated

150,000

2020 gain on sale of machinery

108,000

Working capital

( 42,000 )

PROBLEM 16-11 Rebecca Company revealed the following information on December 31, 2020:  The entity failed to accrue sales commissions at the end of each year as follows: 2018 2019

220,000 140,000

In each case, the sales commissions were paid and expensed in January of the following year.  Errors in ending inventories for the last three years were discovered to be as follows: 2018 2019 2020

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

The unadjusted retained earnings balance on January 1, 2020 is P12,600,000 and the

unadjusted net income for 2020 was P3,000,000. Dividends of P1,750,000 were declared during 2020. 1. What is the adjusted net income for 2020? ANSWER: A a. 3,830,000 b. 3,150,000 c. 3,680,000 d. 3,530,000 2018

2019

2020

(220,000)

220,000 (140,000)

140,000

Unrecorded commissions: 2018 2019 Ending inventory: 2018 understated 2019 overstated 2020 understated Net correction to income

400,000

(400,000) (540,000)

180,000

(860,000)

540,000 150,000 830,000

Net income per book for 2020

3,000,000

Net correction to income Adjusted net income 2020

830,000 3,830,000

2. What is the adjusted balance of retained earnings on December 31, 2020? ANSWER: A a. 14,000,000 b. 13,320,000 c. 13,850,000 d. 11,000,000 Net correction 2018 Net correction 2019 Net correction of prior years

180,000 (860,000) (680,000)

Retained earnings Prior period error Corrected beginning balance Net income for 2020 Dividends declared in 2020 Retained earnings – December 31, 2020

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

PROBLEM 16-12 Holden Company reported the following errors in the financial statements:

Over (under) statement for ending inventory Depreciation understatement Failure to accrue salaries at year-end

2019

2020

(100,000) 40,000 80,000

40,000 60,000 120,000

As a result of the errors, what was the effect on net income for 2020? ANSWER: B a. 240,000 understated b. 240,000 overstated c. 320,000 understated d. 320,000 overstated 2019 2019 ending inventory – under 2020 ending inventory – over Depreciation understatement Accrued salaries unrecorded: 2019

100,000 (40,000) (80,000)

2020 Net correction to income

(20,000)

2020 100,000 (40,000) (60,000) 80,000 (120,000) (240,000)

PROBLEM 16-13 Saturn Company reported the following errors: 2019 Ending Inventory Depreciation expense

50,000 understated 150,000 overstated

2020 100,000 overstated 200,000 understated

None of the errors were detected or corrected and that no additional errors were made in 2021. 1. What is the net effect of the errors on retained earnings on December 31, 2020? ANSWER: D a. 150,000 overstated b. 150,000 understated c. 250,000 overs d. 250,000 understated 2019 inventory- under 2019 depreciation-over Net correction

50,000 150,000 200,000

2019 inventory- under 2020 inventory-over 2020 depreciation-over Net correction

(50,000) (100,000) (200,000) 50,000

2019 net correction 2020 net correction Retained earning

200,000 50,000 250,000

2. By what amount would current assets on December 31, 2021 be overstated or understated? a.100,000 understated b. 100,000 overstated c. 50,000 overstated d. 0

PROBLEM 16-14 Emma Company revealed the following errors in the financial statements: December 31, 2019 inventory understated December 31, 2020 inventory overstated Depreciation for 2019 overstated December 31, 2020 accrued rent income overstated December 31, 2020 accrued salaries understated

500,000 800,000 250,000 300,000 150,000

The understatement of the 2019 ending inventory pertains to goods in transit purchased FOB shipping point which were not recorded on 2019 but paid on 2020. On December 31, 2020, fully depreciated machinery was sold for P100,000 cash but the sale was not recorded until 2021.

1. What is the effect of the errors on net income for 2019? ANSWER: A a. 250,000 understated b. 250,000 overstated c. 500,000 understated d. 0 2019 inventory understated 2019 depreciation overstated Net income for 2019

500,000 (250,000) 250,000

2. What is the effect of the errors on net income for 2020? ANSWER: B a. 1,150,000 understated b. 1,150,000 overstated c. 1,250,000 understated d. 1,250,000 overstated 2020 inventory overstated 2020 accrued rent income overstated 2020 accrued salaries understated Gain on sale of machinery Net income for 2020

( 800,000) ( 300,000) ( 150,000) 100,000 (1,150,000)

3. What is the effect of the errors on retained earnings on December 31, 2020?

ANSWER: D a. 1,150,000 understated b. 1,150,000 overstated c. 900,000 understated d. 900,000 overstated Net income for 2020 Net income for 2019 Retained earnings

(1,150,000) 250,000 ( 900,000)

PROBLEM 16-15

Taal Company revealed the following errors in the financial statements: December 31, 2019 inventory overstated December 31, 2020 inventory understated Depreciation for 2019 overstated Depreciation for 2020 understated December 31, 2019 prepaid insurance understated December 31, 2020 unearned rent income overstated December 31, 2020 accrued salaries understated

35,000 10,000 25,000 8,000 5,000 4,000 20,000

1. What is the effect of the errors on net income for 2019?

ANSWER: D a. 10,000 understated b. 10,000 overstated c. 5,000 understated d. 5,000 overstated 2019 inventory overstated 2019 depreciation overstated 2019 prepaid insurance understated Net correction of income for 2019

2. What is the effect of the errors on net income for 2020? ANSWER: A a. 16,000 understated

(35,000) 25,000 5,000 ( 5,000)

b. 16,000 overstated c. 12,000 understated d. 12,000 overstated 2019 inventory overstated 2020 inventory understated 2020 depreciation understated 2019 prepaid insurance 2020 unearned rent income overstated 2020 accrued salaries understated Net correction of income for 2020

35,000 10,000 ( 8,000) ( 5,000) 4,000 (20,000) 16,000

3. What is the effect of the errors on retained earnings on December 31, 2020?

ANSWER: A a. 11,000 understated b. 11,000 overstated c. 16,000 understated d. 16,000 overstated Net correction of income for 2019 Net correction of income for 2020 Retained earnings

(5,000) 16,000 11,000

4. What is the effect of the errors on working capital on December 31, 2020?

ANSWER: D a. 24,000 understated b. 24,000 overstated c. 6,000 understated d. 6,000 overstated 2020 inventory understated 2020 unearned rent income Working capital

(10,000) 4,000 ( 6,000)

PROBLEM 16-16

Malampaya Company showed income before tax of P6,500,000 on December 31, 2020. The year-end verification of the transactions revealed the following errors: 

P1,000,000 worth of merchandise was purchased in 2020 and included in the ending inventory. However, the purchase was recorded only in 2021.



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 on December 31, 2020.



Advertising for December 2020, amounting to P500,000, was recorded when payment was made in January 2021.



Rent of P300,000 on an equipment applicable for six months was received on November 1, 2020. The entire amount was reported as income upon receipt.



Insurance premium covering the period from July 1, 2020 to July 1, 2021 amount to P200,000 was paid and recorded as expense on July 31, 2020. The entity did not make any adjustment at the end of the year.

What is the corrected income before tax for 2020?

a. 6,900,000 b. 6,400,000 c. 6,500,000 d. 6,300,000 ANSWER: B

Income per book Unrecorded purchase Understatement of ending inventory Unrecorded advertising Unearned rent income (300,000 x 4/6) Prepaid insurance (200,000 6/12) Corrected income

6,500,000 (1,000,000) 1,500,000 ( 500,000) ( 200,000) 100,000 6,400,000

PROBLEM 16-17 During the course of an audit of the financial statements of Julie Company for the year Ended. December 31, 2020, the following data are discovered:   

Inventory on January 1, 2020 had been overstated by P300,000. Inventory on December 31, 2020 was understated by P500,000. An insurance policy covering three years had been purchased on January 1, 2019 forP150,000. The entire amount was charged as an expense in 2019.

During 2020, the entity received a P100,000 cash advance from a customer for merchandise to be manufactured and shipped during 2021. The amount had credited to sales revenue. The gross profit on sales is 50%. Net income for 2020 per book was P2,000,000. What is the proper net income for 2020? ANSWER: A

a. b. c. d.

2,650,000 2,350,000 1,650,000 2,050,000

Net income per book

2,000,000

Overstatement of beginning inventory Understatement of ending inventory Unrecorded insurance for 2019 Cash advance credited to sales Proper net income for 2020

300,000 500,000 ( 50,000) ( 100,000) 2,650,000

been

PROBLEM 16-18 Henson Company had determined the 2019 and 2020 net income to be P4,000,000 and P5,000,000, respectively. In a first time audit of the financial statements, the following errors are discovered:   

Merchandise inventory was incorrectly determined P50,000 overstatement for 2019 and P150,000 overstatement for 2020. Revenue received in advance in 2019 of P300,000 was credited to a revenue account when received. Of the total, P50,000 was earned in 2019, P200,000 was earned in 2020 and the remainder will be earned in 2021. P400,000 gain on sale of equipment in 2020 was erroneously credited to retained

What is the corrected net income for 2020? ANSWER A a. 5,500,000 b. 5,450,000 c. 5,400,000 d. 5,550,000 Net income of 2020 2019 inventory Stated 2020 inventory overstated 2020 revenue collected in advance Gain on sale of equipment Net collection Income of 2020

5,5000 50,000 (150,000) 200,000 400,000 5,500,000

PROBLEM 16-19

MULTIPLE CHOICE

1. If ending inventory is understated, the effect is to a. Overstate the net purchases b. Overstate the gross margin c. Overstate the cost of goods available for sale d. Overstate the cost of goods sold 2. If beginning inventory is overstated, the effect is to a. Overstate net purchases b. Overstate gross margin c. Overstate cost of goods available for sale d. Understate cost of goods sold 3. The overstatement of ending inventory in the current year would cause? a. Retained earnings to be understated in the current year-end statement of financial position. b. Cost of goods sold to be understated in the income statement of next year. c. Cost of goods sold to be overstated in the income statement of the current year. d. Statement of financial position not to be misstated in the next year-end. 4. At the middle of the year, an entity paid for insurance premium for the current year and debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record the amount expired. In the financial statements prepared at year-end, the omission. a. Overstates owners' equity b. Understates assets c. Understates net income d. Overstates liabilities 5. If at the end of current reporting period, an entity erroneously excluded some goods from ending inventory and also erroneously did not record the purchase of these goods, these errors would cause a. b. c. d.

The ending inventory to be overstated The retained earnings to be understated No effect on net income, working capital and retained earnings Net income to be understated

6. When the current year’s ending inventory is overstated a. b. c. d.

The current year’s cost of goods sold is overstated. The current year’s total assets are understated. The current year’s net income is overstated. The next year’s income is overstated.

7. An overstatement of ending inventory in the current period would result in income of

the next period being a. Overstated b. Understated c. Correctly stated d. The answer cannot be determined from the information

8. Which of the following would result if the current year’s ending inventory is understated in the cost of goods sold calculation? a. b. c. d.

Cost of goods sold would be overstated Total assets would be overstated Net income would be overstated Retained earnings would be overstated

9. If the beginning inventory in the current year is overstated, and that is the only error ing the current year, the income for the current year would be. a. b. c. d.

Understated and assets correctly stated. Understated and assets overstated Overstated and assets overstated

Understated and assets understated

10. Which of the following would cause income to be overstated in the period of occurrence? a. Overestimating bad debt expense b. Understating beginning c. Overstated purchases inventory d. Understated ending inventory ALL ANSWERS: 1. B 2. D 3. C 4. A 5. A 6. C 7. B 8. A 9. C 10. B

PROBLEM 16-20 MULTIPLE CHOICE

1. Failure to record the expired amount of prepaid rent expense would not a. Understate expense b. Overstate net income c. Overstate owners’ equity d. Understate liabilities

2. Failure to record accrued salaries at the end of an accounting period results in a. Overstated retained earnings b. Overstated assets c. Overstated revenue d. Understated retained earnings

3. Failure to record depreciation at the end of an accounting period results in a. b. c. d.

Understated income Understated assets Overstated Overstated assets Overstated assets

4. Which of the following is a counterbalancing error? a. b. c. d.

Understated depletion expense Bond premium underamortized Prepaid expense adjusted incorrectly Overstated depreciation expense

5. Which error will not self-correct in the next year? a. b. c. d.

Accrued expense not recognized at year-end Accrued revenue not recognized at year-end Depreciation expense overstated for the current year Prepaid expenses not recognized at year-end

ALL ANSWERS: 1. B 2. D 3. D 4. C 5. C...