CHAPTER 8

ERRORS AND THEIR CORRECTIONS

PROBLEMS

8-1.
2015 profit 2016 profit
a. Understated Overstated
b. Overstated Understated
c. Overstated Understated
d. No effect No effect
e. Understated Overstated
f. Understated (gross profit) Overstated (gross profit)
g. No effect No effect
h. Overstated No effect
i. No effect No effect
j. Overstated Understated
k. Overstated Understated
l. Understated Overstated
m. Overstated Understated

8-2. (JOY COMPANY)

Understatement (overstatement)
12/31/16 12/31/16
Working Retained
2016 Profit Capital Earnings
Understatement of 12/31/15 inventory (148,000) -- --
Overstatement of 12/31/16 inventory (140,500) (140,500) (140,500)
Understatement of 2015 depreciation expense -- -- (11,500)
3-year ins. premium charged to expense in 2015 (120,000) 120,000 120,000
Unrecorded sale of fully depreciated machine in 2016 75,000 75,000 75,000
Net understatement (overstatement) P(333,500) P54,500 P43,000

8-3. (TOY COMPANY)

2015 2016
Reported profit P295,000 P210,000
Overstatement of 2015 ending inventory ( 36,000) 36,000
Understated 2015 accrued expenses ( 40,000) 40,000
Unrecognized supplies inventory, end of 2016 _ - 15,000
Corrected profit P219,000 P301,,000

8-4. (BOY, INC.)

Effect on 12/31/16 Retained Earnings
Understated (Overstated)
Understated 2015 ending inventory 0
Overstated 2015 depreciation expense 12,500
Understated 2016 ending inventory 5,000
Understated 2016 depreciation expense ( 4,000)
Net understatement in retained earnings P13,500

8-5. (COY COMPANY)

(a)
a. Prepaid insurance 9,300
Operating expenses 3,100
Retained earnings 12,400
b. Retained Earnings 16,750
Financial assets at FVPL 16,750
Financial assets at FVPL 24,250
Unrealized Gains on FVPL 24,250
202,500 – 178,250 = 24,250

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Chapter 8 – Errors and their Corrections

c. Operating Expenses 5,500

Allowance for Bad Debts 5,500
98,000 – 92,500 = 5,500

d. Retained earnings 37,750

Cost of goods sold 37,750
Cost of goods sold 49,500
Inventory 49,500

e. Machinery 75,000
Operating expenses 6,250
Retained earnings 68,750
Accumulated depreciation 12,500
(b)
2015 2016
Reported profit P487,500 P550,000
Adjustments: a. 12,400 ( 3,100)
b. (16,750 24,250
c. (5,500)
d. (37,750) 37,750
(49,500)
e. 68,750 ( 6,250)
Corrected profit P514,150 P547,650

8-6. (SOY COMPANY)

2015 2016
Reported profit P145,000 P185,000
(a)Rent income of 2016 recorded in 2015 (6,500) 6,500
(b)Omission of unused supplies
End of 2014 (6,500)
End of 2015 3,700 (3,700)
End of 2016 7,100
(c) Omission of accrued salaries
End of 2014 5,500
End of 2015 (7,500) 7,500
End of 2016 (4,700)
(d) Commissions earned but not yet collected
End of 2014 (12,000)
End of 2015 9,000 (9,000)
End of 2016 15,000
Corrected profit P130,700 P203,700

8-7. (FELLOW COMPANY)

a. Equipment 120,000
Operating expenses 120,000
b. Profit from self-construction 500,000
Warehouse 500,000
c. Operating expenses 100,000
Accumulated depreciation 100,000
1.2M – (60,000 x 5 yrs) =900,000
900,000/(14-5) = 100,000
d. Operating expenses 20,000
Accumulated depreciation 130,000
Gain on sale of machine 30,000
Machine 120,000

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Chapter 8 – Errors and their Corrections

8-8. (DOY CORPORATION)

Inventory Accounts Payable Net Sales

Initial amounts P1,750,000 P1,200,000 P8,500,000
Adjustments: 1. - - (35,000)
2. 50,000 50,000 -
3. 20,000 - -
4. 26,000 - (40,000)
5. 25,000 - -
6. 30,000 - -
7. - 60,000 -
8. 2,000 4,000 -
Adjusted amounts P1,903,000 P1,314,000 P8,425,000

8-9. (SOY COMPANY)

(a) 2014 2015 2016

Reported profit (loss) P490,000 P670,000 P(320,000)
a. Failure to record accrued expenses
2014 (34,000) 34,000
2015 (28,000) 28,000
2016 (43,000)
b. Overstated ending inventories
2014 (63,000) 63,000
2015 (28,000) 28,000
2016 (43,000
c. Failure to record accrued interest revenue
2014 12,000 (12,000)
2015 6,000 (6,000)
2016 8,000
d. Failure to recognize unearned rent
2014 (24,000) 24,000
2015 (20,000) 20,000
2016 (18,000)
e. Failure to record purchases on account
2015 (25,000) 25,000
2016 (20,000)
f. Repairs expense erroneously capitalized
2015 (120,000 – 12,000) (108,000)
2016 (80,000 – 8,000) (72,000)
g. Failure to recognize prepaid insurance
2014 4,800 (4,800)
2015 6,200 (6,200)
2016 ________ ________ 7,800
Correct profit P385,800 P577,400 P(411,400)

(b)
Correcting entries
a. Retained earnings 28,000
Expenses 15,000
Accrued expenses 43,000
b. Retained earnings 28,000
Cost of goods sold 15,000
Inventory 43,000
c. Interest receivable 8,000
Retained earnings 6,000
Interest revenue 2,000
d. Retained earnings 20,000
Rent revenue 2,000
Unearned rent 18,000

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Chapter 8 – Errors and their Corrections

e. Retained earnings 25,000

Accounts payable 20,000
Cost of goods sold 5,000
f. Retained earnings 108,000
Accumulated depreciation 20,000
Expenses 72,000
Property, plant and equipment 200,000
g. Prepaid insurance 7,800
Retained earnings 6,200
Expenses 1,600

MULTIPLE CHOICE QUESTIONS

MC1 B
MC2 C
MC3 B
MC4 A
MC5 A
MC6 A
MC7 B 200,000/5 = 40,000
MC8 A 30,000 over + 27,000 over + 7,500 over – 48,000 under = 16,500 net overstatement.
MC9 A 27,000 over – 7,500 under – 48,000 under = 28,500 net understatement.
MC10 C 27,000 over + 6,000 over – 48,000 under – 7,500 under = 22,500 net
understatement.
MC11 A 250,000 – 100,000 + 150,000 – 50,000 – (30,000 x 4/6) + (120,000 x 18/24 =
320,000
MC12 A 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
MC13 D 312,500 + 25,000 - 4,000 – 50,000 – 18,000 – 30,000 = 235,500
MC14 A 10,000 – 8,000 = 2,000 net understated
MC15 D 10,000 + 25,000 – 8,000 = 27,000 net understated
MC16 C
MC17 C 2012 profit : 8,000 overstated – 2,000 understated ; 2013 profit 8,000
understated – 2,000 overstated.
MC18 B 2,300,000 + 60,000 – 40,000 – 50,000 + 100,000 = 2,370,000
MC19 B 10,000 – 7,700 = 2,300
MC20 D 258,000 – 7,700 = 250,300
MC21 B 589,500 – 112,500 – 16,000 = 461,000
MC22 C
MC23 D 613,400 + 90,000 + 12,000 – 28,000 = 687,400
MC24 A 20,000 + 13,500 – 8,000 = 25,500
MC25 A The shares are treasury shares and not investment in shares
MC26 A
MC27 D
MC28 D
MC29 A
MC30 A 300,00 – 80,000 = 220,000
MC31 A 60,000 – 4,000 – 12,000 = 44,000
MC32 C 434,900 + 12,000 = 446,900
MC33 D 60,000 + 15,000 = 75,000
MC34 C 1,500,000 X 12% x 10/12 = 150,000
MC35 C
MC36 D
MC37 D
MC38 D Retained earnings beginning of 430,000 as reported – correction of prior period
errors of
P20,500 ( - 36,000 + 31,500 – 16,000) + 2011 corrected profit of 298,800
MC39 D
MC40 D 2,500,000 – 112,500 – 50,000 – 80,000 = 2,257,500

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Chapter 8 – Errors and their Corrections

MC41 B 1,300,000 – 90,000 – 36,000 + 28,000 = 1,202,000

MC42 C 500,000 + 7,700 + 30,000 + 18,000 + 8,000 – 4,000 – 16,000 + 15,000 = 558,700
MC43 A 80,000 + 18,000 + Accrued interest of 150,000 * ( although finance costs should be
presented separately, as required by PAS 1, total interest cost included in other
losses and expenses is 190,000); thus, other losses and expenses = 248,000 –
190,000 = 58,000
MC44 B 30,000 – 4,000 = 26,000
MC45 A 20,000 + 31,500 = 51,500
MC46 D 75,000 + 16,000 = 91,000
MC47 B 430,000 – 36,000 + 31,500 – 16,000 = 409,500
MC48 A 950,000 + 36,000 = 986,000
MC49 C 450,000 – 31,500 + 16,000 = 434,500

Correcting entries in 2016 for Take One Corporation (MC 17 – 47)

Operating Expenses 7,700

Cash 7,700

Sales 112,500
Accounts receivable 112,500

Inventories 90,000
Cost of Sales 90,000

Allowance for Bad Debts 16,000

Accounts Receivable 16,000

Operating Expenses 30,000

Allowance for Bad Debts 30,000

Inventories 12,000
Accounts Payable 12,000

Retained Earnings 36,000

Cost of Sales 36,000

Cost of Sales 28,000

Inventories 28,000

Treasury Stock 260,000

Investments in Stock 260,000

Operating Expenses 18,000

Prepaid Expenses 13,500
Retained Earnings 31,500

Operating Expenses 8,000

Prepaid Expenses 8,000

Accumulated Depreciation – Equipment 4,000

Operating Expenses 4,000

Sales 50,000
Accumulated Depreciation – Equipment 12,000
Loss on Sale of Equipment 18,000
Equipment 80,000

Interest Expense (Other Losses and Expenses) 150,000

Interest Payable 150,000

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Chapter 8 – Errors and their Corrections

Mortgage Payable 500,000

Current Portion of Mortgage Payable 500,000

Retained Earnings 16,000

Operating Expenses 16,000

Operating Expenses 15,000

Accrued Expenses 15,000

Sales 80,000
Advances from Customers 80,000

Working Paper adjustments to restate 2015 financial statements

Cost of Sales 36,500

Inventory 36,500

Prepaid expenses 31,500

Operating Expenses 31,500

Operating Expenses 16,000

Accrued Expenses 16,000

Mortgage Payable 500,000

Current Portion of Mortgage Payable 500,000

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