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CCHHAAPPTTEERR 22 –– AAccccoouunnttiinngg ffoorr CCoorrrreeccttiioonn ooff EErrrroorrss

EExxeerrcciisseess

1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy or ! years. On "ecember !1, 2006, Rosete#s unad$usted trial valance s%owed a balance o

be P2&0 reported or prepaid or prepaid insurance insurance and P1!,2!0 and insurance or insurance e'pense e'pense. in Rosete#s (%at "ecember amounts !1, s%ould 2006 inancial statements)

PrepaidInsurance

InsuranceExpense

a. P *,*00

P!,600

b. P10,200

P!,600

c. P10,200

P!,!00

d. P10,200

P!,0!0

2. +n analysis o Palmes Corporation#s unad$usted prepaid e'pense account at "ecember !1, 2006 revealed t%e ollowin-

+n openin balance at P6,000 or Palmes compre%ensive insurance policy. Palmes %ad paid an annual premium o P12,000 on uly 1, 200/.

+ P12,800 annual insurance premium payment made uly 1, 2006.

+ P8,000 advance rental payment or a ware%ouse Palmes leased or 1 year beinnin anuary 1, 2006.

n its "ecember !1, 2006 balance s%eet, w%at amount s%ould Palmes report as prepaid e'penses)

a. P20,00

b.P1,00

c.P8,000

d.P6,00

!. On October 1, 2006, a company sold services to a customer and accepted a note in e'c%ane wit% a P120,000 ace value and an interest rate o 10. 3%e note re4uires t%at bot% t%e principal and interest be paid at t%e maturity date, "ecember 1, 200&. 3%e company#s accountin period is t%e calendar year. (%at ad$ustin entry 5related to t%is note will be re4uired at "ecember !1, 2006 on t%e company#s boo7s)

a. "eerred interest income

b. nterestincome nterestreceivable nterestreceivable

c. nterestreceivable "eerredinterestincome

d. nterestreceivable nterestincome

!,000

!,000

!,000

!,000

!,000

!,000

!,000

!,000

. (%at is t%e purpose o t%e ollowin entry)

upplies

''''

upplies e'pense

''''

a. 3o reconi9e supplies used, i purc%ases o supplies are recorded in supplies.

1

b. 3o reconi9e supplies on %and, i purc%ases o supplies are recorded in supplies e'pense.

c. 3o record t%e purc%ase o supplies durin or at t%e end o t%e period.

d. 3o close t%e e'pense account or supplies at t%e end o t%e period.

/. On "ecember !1, earned but unpaid waes amounted to P1/,000. (%at reversin entry could be made on anuary 1)

a. (aese'pense

b. Prepaide'pense (aespayable (aese'pense

c. (aese'pense Prepaidwaes

d. (aespayable (aese'pense

1/,000

1/,000

1/,000

1/,000

1/,000

 

1/,000

1/,000

 

1/,000

6. + !:year insurance policy was purc%ased on October1 or P6,000, and prepaid insurance was debited. +ssumin a "ecember !1 year:end, w%at is t%e reversin entry at t%e beinnin o t%e ne't period)

a. None is re4uired.

b. Cas% Prepaidinsurance

c. P repaidinsurance

nsurancee'pense

d. nsurancee'pense

Prepaidinsurance

6,000

/,/00

/00

6,000

/,/00

/00

&. + consultin irm started and completed a pro$ect or a client in "ecember 2006.

3%e

pro$ect %as not been recorded on t%e consultin irm#s boo7s, and t%e irm will not receive payment rom t%e client until ;ebruary 200&. 3%e ad$ustin entry t%at s%ould be

made on t%e boo7s o t%e consultin irm on "ecember !1, 2006, t%e last day o t%e irm#s iscal year, is

a. Cas%intransit Consultinrevenue

'''

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b. Consultin revenue receivable Consultinrevenue

'''

'''

c. <nearnedconsultinrev.

'''

Consultinrevenue

d. Consultin revenue receivable <nearnedconsultinrevenue

'''

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'''

8. Cristie Company sublet a portion o its ware%ouse or / years at an annual rental o P1/,000, beinnin on =arc% 1. 3%e tenant paid 1 year#s rent in advance, w%ic% Cristie recorded as a credit to calendar:year basis. 3%e ad$ustment on "ecember !1 o t%e irst year s%ould be

a. No>ntry.

b. <nearned rental income Rentalincome

2,/00

2,/00

c. Rentalincome <nearned rental income

2,/00

2,/00

d. <nearned rental income Rentalincome

12,/00

12,/00

2

*. +ter a successul drive aimed at members o a speciic national association, Online Company received a total o P180,000 or !:year subscriptions beinnin +pril 1, 2006, and recorded t%is amount in t%e unearned revenue account. +ssumin Online records

ad$ustment only at t%e end o t%e calendar year, t%e ad$ustin entry re4uired to relect t%e proper balances in t%e accounts at "ecember !1, 2006 is to

a. "ebit subscription revenue or P1!/,000 and credit unearned revenue or P1!/,000.

b. "ebit unearned revenue or P1!/,000 and credit subscription revenue or P1!/,000.

d. c. "ebit "ebit unearned subscription revenue revenue or or P/,000 P/,000 and and credit credit subscription unearned revenue revenue or or P/,000. P/,000.

10.ay Corporation renewed an insurance policy or !:years beinnin uly 1, 2006 and recorded t%e P81,000 premium in t%e prepaid insurance accounts. 3%e P81,000 premium represents an increase o P2!,00 rom t%e P/&,600 premium c%ared ! years ao. +ssumin ay?# records its insurance ad$ustments only at t%e end o t%e calendar year, t%e ad$ustin entry re4uired to relect t%e proper balances in t%e insurance accounts at "ecember !1, 2006, ay#s year:end is to

a. "ebit insurance e'pense or P1!,/00 and credit prepaid insurance or P1!,/00.

b. "ebit prepaid insurance or P1!,/00 and credit insurance e'pense or P1!,/00.

c. "ebit insurance e'pense or P6&,/00 and credit prepaid insurance or P6&,/00.

d. "ebit insurance e'pense or P2!,100 and credit prepaid insurance or P2!,100.

11.3%e 2006 inancial statements o @ers%ey Company reported net income or t%e year

ended "ecember !1, 2006 o 2 million. On uly 1, 200&, subse4uent to t%e issuance o t%e 2006 inancial statements, @ers%ey c%aned rom an accountin principle t%at is not enerally accepted to one t%at is enerally accepted.  t%e enerally accepted accountin principle %ad been used in 2006, net income or t%e year ended "ecember !1, 2006 would %ave been decreased by 1 million. On +uust 1, 200&, @ers%ey discovered a mat%ematical error relatin to its 2006 inancial statements.  t%is error %ad been discovered in 2006, net income or t%e year ended would %ave been increased by P/00,000.

(%at amount, i any, s%ould be included in net income or t%e year ended "ecember !1, 200& because o t%e items noted above)

a0P.

b.P/00,000decrease

cP. /00,000increase

d.P1,000,000decrease

12.>dcelle Company reported a retained earnins balance o P00,000 at "ecember !1, 200/. n +uust 2006, >dcelle determined t%at insurance premiums o P60,000 or t%e !:year period beinnin anuary 1, 200/ %ad been paid and ully e'pensed in 200/. >dcelle %as a !0 income ta' rate.

(%at amount s%ould >dcelle report as ad$usted beinnin retained earnins in its 2006 statement o retained earnins) a.P2,000 b.P0,000 c.P28,000 d.P20,000

1!.Colasissi Corporation ailed to accrue warranty costs o P/0,000 in its "ecember !1, 200/ inancial statements. n addition, a c%ane rom strai%t:line to accelerated depreciation made at t%e beinnin o 2006 resulted in a cumulative eect o P!0,000 on Colasissi#s retained earnins. Aot% t%e P/0,000 and P!0,000 are net o related income ta'es.

(%at amount s%ould Colasissi report as prior period ad$ustments in 2006)

3

a.P0

b.P!0,000

c.P/0,000

d.P80,000

Buestions 1 and 1/ are based on t%e ollowin inormation.

On October 1, 2006, uri Retailers sined a :mont%, 16 note payable to inance t%e

purc%ase o %oliday merc%andise. +t t%at date, t%ere was no direct met%od o pricin t%e merc%andise, and t%e note#s mar7et rate o interest was 11. uri recorded t%e purc%ase at t%e note#s ace amount. +ll o t%e merc%andise was sold by "ecember 1,

2006. uri#s 2006 inancial statements reported interest payable and interest e'pense

on 200&. t%e note or ! mont%s at 16.

+ll amounts due on t%e note were paid ;ebruary 1,

1.uri#s 2006 cost o oods sold or t%e %oliday merc%andise was

a. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value.

b. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value plus 11 interest or 2 mont%s.

c. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value.

d. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s October 1, 2006 present value plus 11 interest or 2 mont%s.

1/.+s a result o uri#s accountin treatment o t%e note, interest, and merc%andise, w%ic% o t%e ollowin items was reported correctly)

12/31/06

Retained earnings

a.

b.

c.

d. No

es

No

es

12/31/06

Interest payable

es

No

No

es

16.On "ecember !1, 2006, >'cel Corp. sold merc% andise or P&/,000 to ;ineale Co. 3%e terms o t%e sale were net !0, ;OA s%ippin point. 3%e merc%andise was s%ipped on "ecember !1, 2006 and arrived at ;ineale on anuary /, 200&. Aecause o a clerical error, t%e sale was not recorded until anuary 200&, and t%e merc%andise, sold at 2/ mar7up, was included in >'cel#s inventory at "ecember !1, 2006.

+s a result, >'cel#s cost o oods sold or t%e year ended "ecember !1, 2006 was

a.<nderstatedbyP&/,000

b.<nderstatedbyP60,000

c.<nderstatedbyP1/,000

d.Correctlystated

1&.;or t%e past ! years, Dreenwis% Co. %as ailed to accrue unpaid waes earned by wor7ers durin t%e last wee7 o t%e year. 3%e amounts omitted, w%ic% are considered material, were as ollows-

"ecember!1,200!

P/6,000

"ecember!1,200/

/1,000

"ecember!1,2006

6,000

3%e entry on "ecember !1, 2006 to correct or t%ese omissions would include a

a. Credit to wae e'pense or P6,000

b. "ebit to wae e'pense or P/1,000

c. "ebit to wae e'pense or P1!,000

4

d. Credit to retained earnins or P6,000 18.+n audit o ;unny Co. or 2006, its irst year o operations, detected t%e ollowin errors made at "ecember !1, 2006-

;ailed to accrue P/0,000 interest e'pense ;ailed to record depreciation e'pense on oice e4uipment o P80,000 ;ailed to amorti9e prepaid rent e'pense o P100,000 ;ailed to delay reconition o prepaid advertisin e'pense o P60,000

3%e net eect o t%ese errors was to overstate net income or 2006 by

a.P1!0,000

b.P1&0,000

c.P2!0,000

d.P2*0,000

1*.(%ile preparin its 2006 inancial statements, ;alact Corp. discovered computational errors in its 200/ and 200 depreciation e'pense. 3%ese errors resulted in overstatement o eac% year#s income by P2/,000, net o income ta'es. 3%e ollowin amounts were reported in t%e previously issued inancial statements-

2005

Retained earnins, 1E1 Netincome Retained earnins, 12E!1

P &00,000 1/0,000 P 8/0,000
P &00,000
1/0,000
P 8/0,000

2004

P /00,000 200,000 P &00,000
P /00,000
200,000
P &00,000

;alact#s 2006 net income is correctly reported at P180,000. (%ic% o t%e ollowin amounts s%ould be reported as prior:period ad$ustments and net income in ;alact#s

2006 and 200/ comparative inancial statements)

Year

Priorperiodadust!ent

"etinco!e

a2.00/

:

P1/0,000

2006

P5/0,000

180,000

b.200/

5/0,000

1/0,000

2006

:

180,000

c.200/

52/,000

12/,000

2006

:

180,000

d.200/

:

12/,000

2006

:

180,000

20.3%e ollowin inormation appeared on Ali%t nc.#s "ecember !1 inancial statements-

 

2005

2006

+ssets

P 1,000,000

P1,200,000

Fiabilities

&/0,000

800,000

Contributedcapital

120,000

120,000

"ividendspaid

100,000

60,000

n preparin its 2006 inancial statements, Ali%t discovered t%at it %ad misplaced a decimal in calculatin depreciation or 200/. 3%is error overstated 200/ depreciation by P10,000. n addition, c%anin tec%noloy %ad siniicantly s%ortened t%e useul lie o Ali%t#s computers. Aased on t%is inormation, Ali%t determined t%at depreciation s%ould be P!0,000 %i%er in 2006 inancial statements.

+ssumin t%at no correctin or ad$ustin entries %ave been made and inorin income ta'es, %ow muc% s%ould Ali%t report as 2006 net income) a.P2!0,000 b.P210,000 c.P180,000 d.P1&0,000

5

Buestions 21 and 22 are based on t%e ollowin inormation.

+n audit o +nelina Company %as revealed t%e ollowin our errors t%at %ave occurred but %ave not been corrected-

nventory at "ecember !1, 200/:P0,000, understated

nventory at "ecember !1, 2006:P1/,000, overstated

"epreciation or 200/:P&,000, understated

+ccrued e'penses at "ecember !1, 2006:P10,000, understated

21.3%e errors cause t%e reported net income or t%e year endin "ecember !1, 2006 to be

a. OverstatedbyP&2,000

b. OverstatedbyP6/,000

c.<nderstatedbyP28,000

d.<nderstatedbyP/,000

22.3%e errors cause t%e reported retained earnins at "ecember !1, 2006 to be

a. OverstatedbyP6/,000

b. O verstatedbyP!2,000

c. O verstatedbyP2/,000 d. <nderstatedbyP18,000

2!.Collection o notes receivable o P/0,000 plus interest o P/00 was recorded as debit to cas% o P/0,/00 and notes receivable o P/0,/00. 3%is error will

a. Overstate t%e e'penses by P/00

b. <nderstate t%e liability by P/00

c. <nderstate assets by P/00 and understate revenue by P/00

d. <nderstate revenue by P/00

2.+ccounts payable o P!2,000 was paid and erroneously recorded as debit to accounts payable and credit to cas% or P2!,000. 3%e wor7in capital

a. @asnoeect

b. soverstatedbyP*,000

c. sunderstatedbyP*,000 d. sunderstatedbyP2!,000

2/.3%e beinnin accumulated depreciation per record was P100,000. "urin t%e year, t%e irm sold one o its mac%ines recorded as ollows-

2&0,000

+ccumulated depreciation : mac%ine !0,000

Cas%

=ac%ine

!00,000

 t%e actual cas% proceeds is P!00,000, t%e correctin entry would be-

a. Cas%

!00,000

=

ac%ine

!00,000

bC.as%

!0,000

aDinonsaleomac%ine

!0,000

c. +ccumulated depreciation : mac%ine !0,000 Dainon saleomac%ine

!0,000

d. Cas%

!00,000

=

ac%ine

Dainonsaleomac%ine

2&0,000

!0,000

26. Aased on no. 2/, assume t%at t%e nominal accounts %ad been closed. 3%e eect o t%e error to t%e accountin elements, i not corrected, is

a. P!0,000 understatement o t%e net income.

b. P!0,000 understatement o asset and P!0,000 understatement o net income.

c. P!0,000 understatement o asset and P!0,000 understatement o owner#s e4uity.

6

d.

P!0,000 understatement o asset and P!0,000 overstatement o owner#s e4uity.

2&.+ cas% purc%ase o P/,200 was recorded as P2,/00. 3%e error %ad been discovered w%en

nominal accounts were already closed to income summary, but not yet closed to t%e capital account. 3%e correctin entry will re4uire a

a. P2,&00 debit to accounts receivable

b. P2,&00debittopurc%ases

c. P2,&00 credit to purc%ases

d. P2,&00 credit to accounts payable

28.<nder t%e periodic inventory system, t%e endin inventory o P6/,000 was erroneously recorded as P/6,000. 3%e error %ad been discovered w%en all nominal and temporary accounts were already closed to t%e real account. 3%e correctin entry would re4uire a

a. "ebit to capital account c. Credit to cost o sale

b. "ebit to income summary account

d. Credit to owner#s capital

2*.+ sales discount o P/,000 was recorded as purc%ase discount. 3%e error %ad been

discovered w%en nominal accounts were still open. 3%e correctin entry would re4uire a

a. P/,000 debit to purc%ase discount

b. P/,000 credit to purc%ase discount

c. P/,000 credit to sales discount d. P/,000 credit to accounts payable

!0.+n owner#s wit%drawal amountin to

P20,000 debit to owner#s drawins

P20,000 was erroneously recorded as salaries

e'pense. 3%e error %ad been discovered w%en all temporary accounts were already

closed to t%e capital account. 3%e correctin entry will re4uire a

a. P20,000 debit to owner#s capital
b.

c. P20,000 debit to salaries e'pense d. No correctin entry is necessary

!1.+ payment o P20,000 rent was recorded as a debit to rent income. 3%e error %ad been

discovered w%en nominal accounts were already closed. re4uire a

a. P20,000 debit to rent e'pense

b. P20,000debit torentincome

3%e correctin entry would

c. P0,000 credit to rent income d. Noad$ustment entry is necessary

!2.+ cas% collection o P/,000 rom customer#s open account was recorded as P/00.

3%e

error %ad been discovered w%en nominal accounts were still open. 3%e correctin entry would re4uire a

a. P,/00debittoaccountsreceivable

c.

P/00

credit

to

accounts

receivable

b. P,/00debittocas%

d. P/00credittocas%

!!. + sale o merc%andise on account o P!,200 was recorded as P2,!00.

been discovered w%en nominal accounts were already closed. re4uire a

a. P*00debittocas%.

b. P*00 debit to accounts receivable

3%e error %ad

3%e correctin would

c. P*00debittosale d. P*00 credit to accounts receivable

!. + collection o P/,000 notes receivable, plus P/00 interest income was recorded as debit to cas% P/,/00 and credit to notes recei vable P/,/00. 3%e error %ad been discovered w%en nominal accounts were still open. 3%e correctin entry would re4uire a a.P /00debittocas%. c.P /00credittocas%

b. P/00 debit to accounts receivable

d. P/00 credit to interest income

7

!/.3%e accrued interest on a 12, 60:day note o a customer dated "ecember 1, 2006 wit% a ace value o P100,000 was not ta7en up as o "ecember !1, 200. 3%e collection o t%e note, w%ic% matured on anuary !1, 200&, was recorded as

Cas%

102,000

 

Notesreceivable

100,000

nterestncome

2,000

3%e error was discovered ater collection. 3%e correctin entry would re4uire a

a. P2,000 debit to cas%.

b. P2,000 debit to accrued interest receivable

c. P1,000 debit to interest income

d. P2,000 credit to interest income

!6.+ return o merc%andise amountin to P,/00 w%ic% was previously purc%ased on account was recorded as

+ccountspayable

/,00

Purc%ases

/,00

 t%e error %ad been discovered w%en t%e nominal accounts were still open, t%e correctin entry would re4uire a

a.

b.

c. P*00 credit to purc%ases

d. P*00 credit to accounts payable

P*00 debit to purc%ase return

P*00 debit to accounts payable

#ns$er%

1c&

2a&

3d'

4b'

5d&

6a&

(b&

)d&

*d&

10d&

11&d

12&c

13&c

14&a

15&d

16&b

1(&c

1)&b

1*&a

20&c

21&b

22&b

23&c

24&a

25&b

26&c

2(&b

2)&c

2*&b

30&d

31&d

32&b

33&b

34&d

35&c

36&d

8

PPrroobblleemm 11

3%e irst audit o t%e boo7s o Fu9on Company was made or t%e year ended "ecember !1, 2006. n e'aminin t%e boo7s, t%e auditor ound t%at certain items %ad been overloo7ed or incorrectly %andled in t%e last ! years. 3%ese items are-

a.

+t t%e beinnin o 200, t%e company purc%ased a mac%ine or P1,020,000 5salvae

value depreciation, o P102,000 but ailed t%at to %ad deduct a useul t%e lie salvae o 6 years. value in 3%e computin boo77eeper t%e depreciation used strai%t:line base or t%e ! years.

b.

+t t%e end o 200/, t%e company ailed to accrue sales salaries o P*0,000.

c.

+ ta' lawsuit t%at involved t%e year 200 was settled late in 2006. t was determined t%at t%e company owed an additional P1&0,000 in ta'es related to 200. 3%e company did not record a liability in 200 or 200/ because t%e possibility o loss was considered remote, and c%ared t%e P1&0,000 to a loss account in 2006.

d.

Fu9on Company purc%ased anot%er company early in 200 and recorded oodwill o P*00,000. Fu9on %ad not amorti9ed oodwill because its value %ad not diminis%ed. 3%e estimated economic lie o t%e oodwill is 20 years.

e.

n 2006, t%e company wrote o P1&,000 o inventory considered to be obsoleteG t%is loss was c%ared directly to Retained >arnins.

.

ear:end waes payable o P6,800 were not recorded because t%e boo77eeper t%ou% t%at Ht%ey were immaterial.I

.

nsurance or a 12:mont% period purc%ased on November 1 o t%is year was c%ared to insurance e'pense in t%e amount o P/,280 because Ht%e amount o t%e c%ec7 is about t%e same every year.

+uestions

1. 3%e entry to record t%e ad$ustment o item HaI is-

a. +ccumulateddepreciation

!,000

Retainedearnins

1&,000

"epreciatione'pense

1&,000

b. +ccumulateddepreciation

/1,000

Retainedearnins

!,000

"epreciatione'pense

1&,000

c. +ccumulateddepreciation

1&,000

"epreciatione'pense

1&,000

d. +ccumulateddepreciation

1&,000

Retainedearnins

1&,000

2. 3%e entry to record t%e ad$ustment o item HcI-

a. No ad$ustment.

b. Retainedearnins >stimatedliability

1&0,000

1&0,000

c. Fossondamaes >stimatedliability

1&0,000

1&0,000

9

d.

Fossondamaes

1&0,000

Cas%

1&0,000

!.

Net income o 200/ is overstated by-

 

a.

P60,00

b. P!18,00

c. P10&,000

d. P&!,000

.

Net income o 2006 is overstated by-

 

a.

P!6&,000

b. P!12,000

c. P10!,00

d. P6*,00

SS oo ll uu tt ii oo nn

a&

#ccu!ulateddepreciation

51'000

 

,epreciationexpense-2006.

1('000

 

Retainedearnings-20042005.

34'000

b&

Retainedearnings

*0'000

alarieesxpense

*0'000

 

c&

"oadust!ent

d&

"o adust!ent since no indication o i!pair!ent&

 

e&

ossonobsoleteinentory

1(4'000

Retainedearnings

1(4'000

 

&

alariesexpense

6')00

alariepsayable

6')00

 

g&

Prepaidinsurance

4'400

Insuranceexpense

4'400

 
 

2004

2005

2006

 

Ite!#

1('000

1('000

1('000

Ite!

-*0'000.

*0'000

Ite!

Ite! ,

IEte!

-1(4'000.

7Ite!

-6')00.

Ite!8

4'400

"eEtect

99999999999

1('000

9999999999

-(3'000

 
-6*'400.

-6*'400.

#ns$er%

1&

#2&

,3&

,4&

PPrroobblleemm 22

+ CP+ is enaed by t%e ony Corporation in 2006 to e'amine t%e boo7s and records and to ma7e w%atever corrections are necessary. +n e'amination o t%e accounts discloses t%e

ollowin-

a. "ividends %ad been declared on "ecember 1/ in 200 and 200/ but %ad not been entered in t%e boo7s until paid.

b. mprovements in buildin and e4uipment o P*,600 %ad been debited to e'pense at t%e end o +pril 200!. mprovements are estimated to %ave an 8:year lie. 3%e company uses t%e strai%t:line met%od in recordin depreciation and computes depreciation to t%e nearest mont%.

c. 3%e p%ysical inventory o merc%andise %ad been und erstated by P!,000 at t%e end o 200 and by P,!00 at t%e end o 200/.

d. 3%e merc%andise inventories at t%e end o 200/ and 2006 did not include merc%andise t%at was t%en in transit and to w%ic% t%e company %ad title. 3%is s%ipments o P!,800 and P/,/00 were recorded as purc%ases in anuary o 2006 and 200, respectively.

e. 3%e company %ad ailed to record sales commissions payable o P2,100 and P1,&00 at t%e end o 200/ and 2006, respectively.

10

.

3%e company %ad ailed to reconi9ed supplies on %and o P1,200 and P2,/00 at t%e end o 200/ and 2006, respectively.

3%e Retained >arnins account s%owed t%e ollowin postins-

 

"ate

tem

"ebit

Credit

 

200

an1

Aalance

81,000

200/

"ec!1 an10

Netincomeoryear "ividendspaid

1/,000

18,000

 

=ar6

toc7soldJe'cess

 

oveprar

!2,000

 

"ec!1

Netlossoryear

11,200

 

2006

an10

"ividendpaid

1/,000

 

"ec!1

Netlossoryear

12,00

+uestions%

 

1. Corrected net income o 200

 

a.

P1*,800

b. P1/,600

c. P1!,600

d. P16,800

2. Corrected net loss o 200/

 

a.

P16,000

b. P1,000

c. P12,000

d. P10,000

!. Corrected net loss o 2006

 

a.

P16,200

b. P1/,800

c. P1/,200

d. P12,800

. +d$usted retained earnins at "ecember !1, 200

a.

P10*,200

b. P106,00

c. P*,600

d. P8/,000

/. +d$usted retained earnins at "ecember !1, 200/

a.

P&1,200

b. P6*,000

c. P6&,600

d. P6/,000

6. +d$usted retained earnins at "ecember !1, 2006

a.P/1,00

SS oo ll uu tt ii oo nn

b.P*,800

c.P*,000

d.

P 8,200

 

2004

2005

2006

:nadusted"etinco!e/oss

1)'000

-11'200.

-12'400.

Ite!

-1'200.

-1'200.

-1'200.

Ite!

3'000

-3'000.

 

4'300

-4'300.

Ite!,;unrecordedendingin&

3')00

-3')00.

 

5'500

unrecordedpurc<ases

-3')00.

3')00

 

-5'500.

Ite!E

-2'100.

2'100

 

-1'(00.

It7e!

1'200

-1'200.

99999999999

9999999999

2'500

#dusted net inco!e/loss Retainedearnings;beg& Ite!# Ite!;errorinrecordingi!pro& unrecordeddepreciation Retainedearningsend #ns$er%

1*')00

-12'000.

-16'200.

)1'000

*4'600

6('600

-15'000.

-15'000.

*'600

-)00.

*4'600

*4'600

999999999

6('600

999999999999

51'400

 

#1&

2&

#3&

4&

5&

#6&

11

PPrroobblleemm 33

+ partial trial balance o os% +le$andro Corporation is as ollows on "ecember !1, 2006-

 

"rK.KKK

KKKKCr.KKKK

upplieson%and +ccruedsalariesandwaes nterest receivable on investments Prepaidinsurance <nearnreednt +ccruedinterestpayable

P

1!,/00

 

P&,/00

 

2/,/00

/0,000

 

:0:

&/,000

+dditional ad$ustin data-

a.

+ p%ysical count o supplies on %and on "ecember !1, 2006, totaled P/,/00.

b.

3%rou% oversi%t, t%e +ccrued alaries and (aes account was not c%aned durin 2006. +ccrued salaries and waes on 12E!1E06 amounted to P22,000.

c.

3%e interest receivable on investments account was also let unc%aned durin 2006. +ccrued interest on investments amounts to P21,&/0 on 12E!1E06.

d.

3%e une'pired portions o t%e insurance policies totaled P!2/,000 as o "ecember

!1, 2006.

e.

P10,000 was

received on anuary 1, 200/, or t%e rent o a buildin or bot% 200/

and 2006. 3%e entire amount was credited to rental income.

.

"epreciation or t%e year was erroneously recorded as P2/,000 correct iure o P2/0,000.

rat%er t%an t%e

.

+ urt%er review o depreciation calculations o prior year revealed t%at depreciation o P!6,000 was not recorded. t was decided t%at t%is oversi%t s%ould be corrected by a prior period ad$ustment.

+uestions

1. 3%e accrued salaries and waes at year:end is-

a.

P2*,/00

b.P22,000

c. P1,/00

d. P &,/00

2. @ow muc% is t%e ad$usted salaries and waes at year:end assumin t%at t%e balance o t%is account in t%e boo7 is P!/0,000)

a.

P!&*,/00

b. P!&2,000

c. P!6,/00

d. P!2,/00

!. Prepaid insurance at year:end is-

 

a.

P/0,000

b. P!2/,000

c. P12/,000

d. P0

. upplies on %and at year:end is-

 

a.

P1!,/00

b.P8,000

c.P/,/00

d.P2,/00

/. "epreciation e'pense at year:end is-

a. <nderstated by P22/,000

b. Overstated by P22/,000

c. <nderstated by P261,000

d. Overstated by P261,000

12

SS oo ll uu tt ii oo nn

1&

uppliesexpense

)'000

upplieos<nand

)'000

2&

#ccruedsalariesand$ages

('500

alariesand$agesexpense

('500

=o reerse accrued salaries& alariesand$agesexpense

22'000

#ccrued salaries and $ages

22'000

3&

Interestinco!e Interestreceiable

25'500

25'500

=o reerse accrued inco!e& Interestreceiable

21'(50

Interesitnco!e

21'(50

4&

Insuranceexpense

125'000

Prepaidinsurance

125'000

5&

Retainedearnings

(0'000

Renintco!e

(0'000

6&

,epreciationexpense

225'000

#ccu!ulated depreciation

225'000

(&

Retainedearnings

36'000

#ccu!ulated depreciation

36'000

#ns$er%

1&

2&

3&

4&

#5&

PPrroobblleemm 44

3%e beore ta' income or ;ran9ine Dome9 Co. or 200/ was P!0!,000 and P2!2,200 or 2006. @owever, t%e accountant noted t%at t%e ollowin errors %ad been made-

1. ales or 200/ included amounts o P11,600 w%ic% was received in cas% durin 200/, but or w%ic% t%e related products were delivered in 2006. 3itle did not pass to t%e purc%aser until 2006.

2. 3%e inventory on "ecember !1, 200/, was understated by P2/,*20.

!. 3%e boo77eeper in recordin interest e'pense or bot% 200/ and 2006 on bonds payable made t%e ollowin entry-

ntereste'pense

Cas%

1/,000

1/,000

were 3%e bonds issued %ave at a a discount ace value o P1/,000 o P2/0,000 on anuary and pay 1, 200/, a stated to yield interest an rate eective o 6. interest 3%ey o &. 5+ssume t%at t%e eective yield met%od s%ould be used.

. Ordinary repairs to e4uipment %ad been erroneously c%ared to t%e >4uipment account durin 200/ and 2006 or P2/,/00 and P!0,000, respectively. 3%e company applies a rate o 10 to t%e balance in t%e e4uipment account at t%e end o t%e year in its determination o depreciation c%ares.

+uestions

1. 3%e ad$usted 200/ net income is-

a.

P22,120

b. P1*,120

c. P1*2,*20

2. 3%e ad$usted 2006 net income is-

d. P18*,*20

13

a.

P2*,8&8

b. P2*1,8&8

c. P180,2&8

d. P 6/,6&8

!. 200/ net income is overstated by-

 

a. P2!2,200

b. P22*,200

c. P11!,080

d. P

!,000

.

2006netincomeis-

a. <nderstated by P62,6&8

b. <nderstated by P/*,6&8

d. c. Overstated Overstated by by P/1,*22 P166,/22

/. 3%e correctin entry in item H1I is-

a. +ccountsreceivable

11,600

ales

11,600

b. ales

11,600

+ccountsreceivable

11,600

c. Retainedearnins

11,600

ales

11,600

d. ales

11,600

Retainedearnins

11,600

SS oo ll uu tt ii oo nn

1&

Retainedearnings

114'600

ales

114'600

2&

ostosales-beg&in.

25'*20

Retainedearnings

25'*20

3&

Retainedearnings

1'450

Interestexpense

1'552

,iscountonbondspayable

3'002

Int&paid

Int&exp&

#!ort&

arrying

 

>alue

235'000

 

2002 15'000

16'450

1'450

236'450

2003 15'000

16'552

1'552

23)'002

4&

Retainedearnings

25'500

Repairsexpense

30'000

E?uip!ent

55'500

#ccu!ulated depreciation

5'100

Retainedearnings

2'550

,epreciationexpense

2'550

#ccu!ulated depreciation

3'000

,epreciationexpense

3'000

 

2002

2003

 

:nadustednetinco!e

303'000

232'200

Ite!1

-114'600.

114'600

Ite!2

25'*20

-25'*20.

Ite!3

-1'450.

-1'552.

Ite!4

-25'500.

-30'000

 errorinrecordingdepreciation

2'550

2'550

#dusted net inco!e #ns$er%

9999999999 1)*'*20
9999999999
1)*'*20

3'000

2*4')()
2*4')()

1&

,

#2&

3&

#4&

5&

14

PPrroobblleemm 55

ou %ave been assined to e'amine t%e inancial statements o =acelle Company or t%e year ended "ecember !1, 2006. Aelow is t%e Aalance %eet o t%e company.

Currentassets &00,000 Currentliabilities

Non:current assets 2,000,000 Non:current liabilities*00,000

2/0,000

3otal +ssets

2,&00,000 KKKKKKKKK 3otalliabilitiesE@> toc7%olders# >4uity 2,&00,000 1,//0,000

toc7%olders# >4uity 2,&00,000 1,//0,000 n t%e course o your audit, you discover t%e

n t%e course o your audit, you discover t%e ollowin situations-

1. "epreciation o P16,000 or 2006 on delivery ve%icles was not recorded.

2. 3%e p%ysical inventory count on "ecember !1, 200/, improperly e'cluded merc%andise costin P*/,000 t%at %ad been temporarily stored in a public ware%ouse. =acelle uses periodic inventory system.

!. 3%e p%ysical inventory count on "ecember !1, 2006, improperly included merc%andise wit% a cost o P2,/00 t%at %ad been recorded as a sale on "ecember 2&, 2006.

. + collection o P28,000 on account rom a customer received on

was not recorded until anuary 2, 200&.

"ecember !1, 2006

/. n 2006, t%e company sold or P18,/00 ully depreciated e4uipment t%at oriinally cost P110,000. 3%e company credited t%e proceeds rom t%e sale to t%e >4uipment account.

6. "urin November 2006, a competitor company iled a patent:inrinement suit aainst =acelle claimin damaes o P1,100,000. 3%e company#s leal counsel %as indicated t%at an unavorable verdict is probable and a reasonable estimate o t%e court#s award to t%e competitor is P62/,000. 3%e company %as not relected or disclosed t%is situation in t%e inancial statements.

&. =acelle %as a portolio o tradin securities. No entry %as been made to ad$ust to mar7et. normation on cost and mar7et value is as ollows-

 

CO3

=+RL>3

"ecember!1,200/

P1*0,000

P1*0,000

"ecember!1,2006

168,000

16,000

8. +t "ecember !1, 2006, an analysis o payroll inormation s%ows accrued salaries o P!6,600. 3%e +ccrued alaries payable account %ad a balance o P8,000 at "ecember !1, 2006, w%ic% was unc%aned rom its balance at "ecember !1, 200/.

*. + lare piece o e4uipment was purc%ased on anuary !, 2006, or P1,600,000 and was c%ared to Repairs >'pense. 3%e e4uipment is estimated to %ave a service lie o 8 years and no residual value. =acelle normally uses t%e strai%t J line depreciation met%od or t%is type o e4uipment.

10.+ P&/,000 insurance premium paid on uly 1, 200/, or a policy t%at e'pires on une !0, 200*, was c%ared to insurance e'pense.

15

11.+ trademar7 was ac4uired at t%e beinnin o 200/ or P2/0,000. No amorti9ation %as been recorded since its ac4uisition. 3rademar7 %as an economic lie o / years.

+uestions

1. Current assets at year:end is-

 

a.

P&&6,000

b. P6*/,000

c. P6*1,000

d. P6&8,/00

2. Non:current assets at year:end is-

 
 

a.

P!,*8,/00

b. P !,02,/00

c. P !,!02,/00

d. P !,2*8,/00

!. Current liabilities at year:end is-

 
 

a.

P*11,600

b. P86!,600

c. P286,600

d. P2!8,600

. Non:current liabilities at year:end is-

 
 

a.

P1,/61,600

b. P1,/2/,000

c. P 1,/1!,600

d. P *00,000

/. 3%e net income o 2006 is understated by-

 
 

a.

P622,00

b. P60!,*00

c. P/68,00

d. P//*,*00

6.

3%e total amount o undamental error is-

 

a.

P1&6,000

b. P1/&,/00

c. P10&,/00

d. P2/,000

&. 3otal toc7%olders# >4uity at year:end is-

 
 

a.

P2,!2*,*00

b. P

2,22*,*00

c. P 2,22&,00

d. P 2,0**,00

8. 3%e correctin entry o item H!I assumin t%e company#s boo7s were already closed is-

a. No ad$ustment

b. Retainedearnins Costosales

2,/00

2,/00

 

c. Costosales Retainedearnins

2,/00

2,/00

 

2,/00

d. Retained >arnins nventory

SS oo ll uu tt ii oo nn

 

2,/00

1&

,epreciationexpense

16'000

#ccu!ulated depreciation

16'000

2&

ostosales-beg&in.

*5'000

Retainedearnings

*5'000

3&

osotsales

42'500

4&

5&

6&

(&

)&

*&

16

as< Inentory #ccounts receiable #ccu!ulated depreciation @ac<inery

8aoisnnale

ossonda!ages

Esti!atedliabilityonda!ages :nrealiAed<oldingloss >aluation allo$ance

2)'000

110'000

625'000

26'000

42'500

2)'000

*1'500

1)'500

625'000

26'000

@arBetalue;beg&

1*0'000

@arBetalue;end

164'000

:nrealiAed<oldingloss alariespayable

26'000
26'000

4)'000

36'600

 

alarieesxpense

4)'000

=o reerse accrued salaries& alariesexpense

alariepsayable

36'600

E?uip!ent

1'600'000

Repairsexpense ,epreciation expense #ccu!ulated depreciation 10& Insuranceexpense Prepaidinsurance

Retaineedarnings 11& "o a!ortiAation since no inor!ation about its i!pair!ent&

1'600'000

200'000

200'000

25'000

3('500

#ns$er%

1&

2&

3&

4&,

5&

6&#

(&#

)&,

62'500

PPrroobblleemm 66

=atias Corporation re4uires audited inancial statements or credit purposes.

+ter ma7in

normal ad$ustin entries, but beore closin t%e accountin records or t%e year ended

"ecember !1, 2006.

2006-

=atias#s controller prepared t%e ollowin inancial statements or

=atias Corporation 3+3>=>N3 O; ;N+NC+F PO3ON

,ece!ber 31' 2006

#ssets

Cas%

1,22/,000

=ar7etablee4uitysecurities

12/,000

+ccountsReceivable

60,000

+llowanceordoubtulaccounts

5 //,000

nventories

/!0,000

Propertyande4uipment

+ccumulated"epreciation

3ota+lssets

iabilities and tocB<oldersC E?uity

620,000

5 280,000

and tocB<oldersC E?uity 620,000 5 280,000 2,62/,000 +ccountspayableandaccruedliabilities 1,68/,000

2,62/,000

+ccountspayableandaccruedliabilities

1,68/,000

ncometa'payable

110,000

Commonstoc7,P20par

!00,000

+dditionalpaid:incapital Retainedearnins 3otal liabilities and stoc7%olders# e4uity

&/,000

//,000 3otal liabilities and stoc7%olders# e4uity &/,000 =atias Corporation 3+3>=>N3 O; NCO=> 7or

=atias Corporation 3+3>=>N3 O; NCO=>

7or t<e Year Ended ,ece!ber 31' 2006

Neatles Cosostales DrosPsroit Operatin >'penses

Neatles Cosostales DrosPsroit Operatin >'penses
Neatles Cosostales DrosPsroit Operatin >'penses

ellinandadministrative

1,&00,000

/&0,000

1,1!0,000

8,000

"

epreciation

2,000

2,000 60,000 1*2,000 8,000

60,000

1*2,000

8,000

ncomebeoreincometa'

ncometa'e'pense

Nentcome

=atias#s ta' rate or all items was !0 or all aected years, and it made estimated ta' payments w%en due. =atias %as been proitable in t%e past and e'pects results in t%e uture to be similar to 2006. "urin t%e course o t%e audit, t%e ollowi n additional inormation 5not considered w%en t%e above statements were prepared was obtained-

17

1.

3%e investment portolio consists o s%ort:term investment, classiied as available:or:

sale, or w%ic% total mar7et value e4ualed cost at "ecember !1, 200/. On ;ebruary 2, 2006, =atias sold one investment wit% a carryin value o P100,000 or P1!0,000. 3%e total o t%e sale proceeds was credited to t%e investment account.

2. +t "ecember !1, 2006, t%e mar7et value o t%e remainin securities in t%e portolio was

P12,000.

!. 2006, 3%e P/!0,000 was priced inventory at cost. total, ubse4uently, w%ic% was it based was determined on a p%ysical t%at count t%e inventory at "ecember cost !1, was overstated by P66,000. +t "ecember !1, 2006, t%e inventory#s mar7et value appro'imated t%e ad$usted cost.

. Pollution control devices costin P8,000, w%ic% is %i% in relation to t%e cost o t%e oriinal e4uipment, were installed on "ecember 2*, 200/, and were c%ared to repairs in

200/.

/. 3%e oriinal e4uipment reerred to in tem , w%ic% %ad a remainin useul lie o si' years on "ecember 20, 200/, is bein depreciated by t%e strai%t:line met%od or bot% inancial and ta' reportin.

6. + lawsuit was iled aainst =atias Corporation in October 2006 claimin damaes o

P2/0,000.

and a reasonable estimate o t%e court#s award to t%e plainti is P60,000, w%ic% will be paid in 200& i t%e case is settled.

Company#s leal counsel believes t%at an unavorable outcome is probable,

+uestions

1. =ar7etable >4uity ecurities at year:end is-

a.

P1//,000

b. P12/,000

c. P*/,000

d. P82,000

2. +llowance or mar7et decline in value o mar7etable e4uity security at year:end is-

a. P0

b.P8,000

!. nventory at year:end is-

c.P10,000

d.P1!,000

a.

P6,000

b. P/12,000

c. P/!0,000

d. P/*6,000

. Cost o sales at year:end is-

 

a.

P6!6,000

b. P/&0,000

c. P//0,000

d. P/0,000

/. Net income o t%e company is-

 

a.

P!**,&00

b. P!&*,000

c. P!66,100

d. P!!1,000

SS oo ll uu tt ii oo nn

1&

@arBetablee?uitysecurities

30'000

8aoisnnale

30'000

2&

osson!arBetdecline

13'000

#llo$ance or !arBet decline

13'000

3&

osotsales

66'000

Inentory

66'000

4&

E?uip!ent

4)'000

Retainedearnings

4)'000

5&

,epreciation

)'000

#ccu!ulated depreciation

)'000

6&ossonda!ages

60'000

Esti!atedliabilityonda!ages

#ns$er%

18

60'000

1&

#

,2&

#3&

#4&

5&

PPrroobblleemm 77

Fon establis%ed a retail business in 200. >arly in 200&, Fon entered into neo tiations wit% %ort wit% t%e intent to orm a partners%ip. ou %ave been as7ed by Fon and %ort to c%ec7 Fon#s boo7s or t%e past t%ree years to %elp %ort evaluate t%e earnins potential o t%e business.

3%e net incomes reported on statements submitted to you were as ollows-

ncome,preta'

200

P6!,000

ear endin 12E!1

200/

P&0,&6!

2006

P61,880

"urin t%e e'amination o t%e accounts, you ound t%e data iven below-

Omission rom t%e boo7s

200

;or year ended "ec. !1

200/

2006

a. +ccrued e'penses at end o year

b. >arned 5uncollected revenue at end o year

c. d. <nearned Prepaide'pensesatendoyear revenue 5collected in advance aetnyodear

P 1/,120

1,00

6,!1

,2&0

Doods in transit at end o year omitted rom inventory

e.

Purc%ase or w%ic% t%e entry %ad been made

5owners%ippassed

.

Purc%ase or w%ic% t%e entry %ad not been made

5owners%ipnotpassed

Ot%er points re4uirin considerations-

P 1,6/8

P !2,!68

8,&0

*,82

18,2&0

21,60

11,*&0

1!,&10

.

On anuary 1, 2006, sold operational e4uipment or P!1,/00 t%at oriinally cost P!/,000

on anuary 1, 200. Cas% was debited or P!1,/00 and e4uipment was credited or P!1,/00. 3%e asset sold was depreciated in 200 and 200/ but not on t%e 2006 on t%e basis o a 10:year lie and no residual value.

%.

No allowance or bad debts %as been set up. +n analysis o accounts receivable as o "ecember !1, 2006, indicates t%at t%e allowance account s%ould %ave a balance o P1,000, o w%ic% P!,/00 relates to 200, P,*00 to 200/, and P/,600 to 2006.

+uestions

1. +d$usted net income o 200 is-

a.

P8/,8!

b. P82,!!

c. P/2,0*

d. P!*,66

2. +d$usted net income o 200/ is-

 

a.

P81,66*

b. P81,081

c. P80,1/&

d. P&6,&6*

19

!. +d$usted net income o 2006 is-

a.

P86,/02

b. P/6,682

c. P/1,082

d. P2,682

. nventory at year:end is understated by-

 

a.

P!,!&0

b. P&,*!0

c. P21,60

d. P!/,!/0

/. +ccrued e'penses at year:end is-

a. OverstatedbyP1&,&10

b. <nderstatedbyP!2,!68

SS oo ll uu tt ii oo nn

c.< nderstatedbyP!1,*08 d. < nderstatedbyP1&,&10

 

2004

2005

2006

 

:nadustednetinco!e

63'000

(0'(63

61'))0

Ite!#

-15'120.

15'120

 

-14'65).

14'65)

 

-32'36).

 

Ite!

1'400

-1'400.

Ite!

6'314

-6'314.

 

)'4(0

-)'4(0.

 

*')42

 

Ite,!

-4'2(0.

4'2(0

IteE!

1)'2(0

-1)'2(0.

 

21'640

7

Ite!

8Ite!

3'500

Ite!D #dusted net inco!e

#ns$er%

1&

2&

3&

-3'500.

52'0*4
52'0*4

4&

-4'*00.

)1'0)1
)1'0)1

5&

-5'600.

51'0)2
51'0)2

PPrroobblleemm 88

MFF+ F"+ CO 3%e records o t%e Company %ave not been e'amined or t%e t%ree:year period ended "ecember !1, 2006. +s a result o your audit o t%e records or t%e year ended "ecember !1, 2006 and your review o t%e records o t%e two prior years, it is necessary to revise t%e net income and t%e retained income based upon t%e audited data, w%ic% ollows-

3%e company#s retained income at "ecember !1, 2006 ollows-

Aalance,12E!1E0

P*0,000

Netincome,200/

100,000

Netincome,2006

110,000

Aalance,12E!1E06

P!00,000

;rom your e'amination, you obtained t%e ollowin inormation w%ic% must be ta7en into consideration at t%e close o t%e year involved-

"ecember !1, 200

1.

Doods consined out to consinees are included in t%e inventory at P120,000, w%ic% is 20 percent in e'cess o cost.

2.

>4uipmentwit% a 10:year:liewas purc%asedor P!0,000andc%aredto e'pense on "ecember !1.

!.

3%eollowinliabilitiesareomittedromt%erecords-

=aterialsincludedininventory

P!,000

+ccruedta'es

,100

20

"ecember !1, 200/

.

/. =ar7etable ecurities costin P1/,000 were at a m ar7et value o only

<ncollectible accounts receivable o P*,000 are to be written o.

P*,000.

6. Dain o P!,000 on sale o ully depreciated e4uipment was credited to t%e allowance or depreciation.

&. 8.

*.

FandcostoP*,000%ad 3%e inventory is overstated beenerroneously by P1,!00 because c%aredtoe'pense. o an error in ootin an inventory price s%eet.

"epreciationwasomittedGP/,000s%ouldbeprovided.

"ecember !1, 2006

10. 3%eollowinliabilities are omittedrom t%erecords-

;or purc%ases o new mac%inery on "ecember !1, 2006 +ccrutead'es

P12,000

/,*00

+uestions

1. +d$usted net income o 200/ is-

a.

P11*,00

b. P110,800

2. +d$usted net income o 2006 is-

a.

P8*,800

b. P*8,600

!. +d$usted retained earnins o 200 is-

a.

P112,*00

b. P10*,*00

. +d$usted retained earnins o 200/ is-

a.

P180,&00

b. P20!,&00

/. +d$usted retained earnins o 2006 is-

a.

P16,200

b. P16,000

c. P102,600

d. P *0,800

c. P11/,00

d. P1/,00

c. P*2,*00

d. P8*,*00

c. P212,/00

d. P212,!00

c. P!1*,100

d. P2*6,100

6 3%e entry to correct inormation Hnumber !I at "ecember !1, 2006 is-

a. Retained earnins +ccruedta'es

,100

,100

!,000

b. Costosales +ccountspayable

c. Retainedearnins ,100

!,000

Costosales

!,000

+ccruedta'es

,100

+ccountspayable

!,000

d. No ad$ustin entry is necessary.

*. 3%e entry to correct inormation Hnumber I at "ecember !1, 2006 is-

a. +llowanceor bad debts +ccountsreceivable

*,000

*,000

b. Retainedearnins +ccountsreceivable

*,000

*,000

c. Retained earnins

*,000

+llowanceorbaddebts

*,000

21

d.

No ad$ustin entry is necessary

8. +d$usted net income o 200 5assumin P8/,000 is recorded as net income o 200 is-

a.

P116,*00

b. P11/,000

c. P10&,*00

SS oo ll uu tt ii oo nn

1&

"o adust!ent since t<e 2004 inancial state!ent $as not aected&

d. P 8&,*00

2&

E?uip!ent

30'000

 

Retaineedarnings

30'000

,epreciationexpense Retainedearnings

3'000 3'000

 

#ccu!ulated depreciation

6'000

3&

"o adust!ent since t<e 2004 inancial state!ent $as not aected&

4&

#llo$anceorbaddebts #ccounts receiable Retainedearnings #llo$ance or !arBet decline #ccu!ulateddepreciation Retaineedarnings and Retaineedarnings Retainedearnings osotsales Retainedearnings #ccu!ulated depreciation

*'000

 
 

*'000

5&

6'000

 
 

6'000

6&

3'000

 
 

3'000

(&

*'000

 
 

*'000

)&

14'300

 

14'300

 

*&

5'000

 
 

5'000

10&@ ac<inery #ccounts payable ; ot<ers =axes #ccrued taxes

 

12'000

 
 

12'000

 

5'*00

 
 

5'*00

 

2004

2005

2006

 

:nadustednetinco!e

100'000

110'000

Ite!1

-20'000.

 

20'000

Ite!2

30'000

-3'000.

-3'000.

Ite!3

-3'000.

 

3'000

 

-4'100.

 

4'100

4

Ite!

It5e!

-6'000.

I6te!

3'000

I(te!

*'000

Ite)!

-14'300.

14'300

It*e!

-5'000.

Ite!10

-5'*00.

#dusted net inco!e Retainedearningsbeg #dust!ents%

It2e! Ite1!

999999999

999999999

110')00

115'400

 

*0'000

203'(00

 

-20'000. 30'000

It3e!

-3'000.

 

-4'100.

999999999 31*'100
999999999
31*'100
 

Retainedearningsend

203'(00

203'(00

#ns$er%

1&

2&

3&

4&

5&

6&,

(&#

)&,

PPrroobblleemm 99

3%e Corporation prepared its own income statement or t%e years 200/ and 2006. 3%e President was not satisied and decided to enae t%e services o a CP+. 3%e ollowin errors were discovered by t%e CP+-

22

KKK200/KK

KKK2006KKK

Netincomeaterincometa' P12!,2/0 P1/6,2/0

nventory understatement at year:end P

KKK200/KK KKK2006KKK Netincomeaterincometa' P12!,2/0 P1/6,2/0 nventory understatement at year:end P : P 12,/00

:

P 12,/00

Prepaide'pensesnotta7enup

/,000

1/,000

=erc%andise purc%ased on account not Recorded as liability but included in inventory

<nearnedrentreceivedta7enintoincome

+ccruedta'esunrecorded

2/,000

20,000

+uestions

1.

Net income o 200/ is-

a.

P16!,2/0

2.

Net income o 2006 is-

a.

P1**,&/0

SS oo ll uu tt ii oo nn

b. P108,2/0c . P8!,2/0

b. P 1&,&/0 c. P 1,&/0

*,000

1/,000

d. P&!,2/0

d.P12,2/0

 

2005

2006

:nadustednetinco!e

123'250

156'250

 

12'500

 

5'000

-5'000.

 

15'000

 

-25'000.

25'000

 

-*'000.

 

-20'000.

20'000

9999999999

-15'000.

1**'(50
1**'(50

#dusted net inco!e #ns$er%

)3'250

1&

2#&

PPrroobblleemm 11OO

(i9ard Company, a calendar:year sole proprietors%ip, maintained its boo7s on t%e cas% basis durin t%e year

(i9ard is in t%e process o neotiatin a ban7 loan to inance t%e planned e'pan sion o its business. 3%e ban7 is re4uestin 2006 inancial statements prepared on t%e accrual basis o accountin rom (i9ard. +s (i9ard#s e'ternal auditor, you were called upon to assist in preparin t%e inancial statements. 3%e ollowin inormation were obtained durin t%e course o your enaement-

(i9ard Company

3R+F A+F+NC>

"ecember !1, 2006 "ebits

 

Credits

Cas%

P8,000

+ccountsreceivable,12E!1E0/

28!,/00

nventory,12E!1E0/

1,08/,000

;urniture;i'tures Fease%oldimprovements

2,068,/00

&8&,/00

+ccumulateddepreciation,12E!1E0/

P

/6&,000

+ccountpsayable (i9ard, "rawins

2*&,/00

(i9ard,Capital,12E!1E0/

2,180,/00

ales

11,2&,/00

Purc%ases

/,!!*,2/0

alariese'pense

!,0/,000

3a'esandlicenses

21&,000

nsurancee'pense

1/2,2/0

Rente'pense

/*8,/00

23

<tilitiese'pense

220,/00

Fivin e'penses

22&,/00

   

KKKKKKKKK

P 1,&2,/00

 

P 1,&2,/00

+dditional inormation-

1. +t "ecember !1, 2006, amounts due rom customers totaled P1/,000.

2. Aased on t%e analysis o t%e above receivables, P20,&/0 may prove uncollectible.

!. <npaid invoices or t%e plant purc%ases totaled P/!!,&/0 and P2*&,/00 at "ecember !1, 2006 and "ecember !1, 200/ respectively.

. 3%e inventory totaled P1,2&,000 based on a p%ysical count o t%e oods at "ecember !1, 2006. 3%e inventory was priced at cost, w%ic% appro'imates mar7et value.

/. On =ay 1. 2006, (i9ard paid P1/2,2/0 to renew its compre%ensive insurance coverae

or one year. 3%e premium on t%e previous policy, w%ic% e'pired on +pril !0, 2006, was

P1!6,/00.

6. On anuary 2, 2006, (i9ard entered into a twenty:year operatin lease or t%e vacant lot ad$acent (i9ard#s retail store used as a par7in lot. +s areed in t%e lease, (i9ard paved and enced in t%e lot at a cost o P&8&,/00. 3%e improvements were completed on +pril 1, 2006, and estimated to %ave a useul lie o iteen years. No provision or

depreciation %as been recorded. "epreciation on urniture and i'tures was P210,000 or
2006.

&. +ccrued e'penses at "ecember !1, 2006 and 200/ were as ollows-

3a'esandlicenses

2006

!6,000
!6,000

P!!,&/0

P6*,&/0

200/

P20,2/0 2,&/0
P20,2/0
2,&/0

P/,000

<tilities

8. (i9ard is bein sued or P,000,000. 3%e coverae under t%e compre%ensive insurance policy is limited to P2,/00,000. (i9ard#s attorney believes t%at an unavorable outcome is probable and t%at a reasonable estimate o t%e settlement is P!,000,000.

*. 3%e salaries account includes P0,000 per mont% paid to t%e proprietor. (i9ard also receives P,!&/ per wee7 or livin e'penses.

+uestions

"etermine t%e balances o t%e ollowin under t%e accrual basis o accountin.

1. +ccounts Receivable

a.

1/,000

b. P28!,/00

c. P1!1,/00

d. P1/2,000

2. +ccounts Receivable, net

 

a.

P08,2/

b. P0,62/

c. P!*,2/0

d. P262,/00

!. nventory

 

a.

P1,2&,000

b. P1,08/,000

c. P18*,000

d. P8*6,000

. Prepaid nsurance

 

a.

P1&,000

b. P *6,2/0

c. P /0,&/0

d. P0

24

/.

Propertyande4uipment,net

 
 

a. P2,8/6,000

b. P 2,616,6*

c. P 2,0!*,62/

d. P 1,8/8,/00

6.

+ccountspayable

 
 

a. P/!!,&/0

b. P/2!,&/0

c. P2*&,/00

d.P2!6,2/0

&.

+ccrued>'penses

 
 

a. P11,&/0

b. P6 *,&/0

c. P2,&/0

d. P0

8.

(i9ard,"rawins

 
 

a. P&0&,/00

b. P80,000

c. P22&,/00

d. P0

*.

(i9ard,Capital,12E!1E0/

 
 

a. P 2,226,000

b. P 2,181,000

c. P 2,180,/00

d. P 2,1!/,/00

10.

ales

 

a. P 11,82,/00

b.

P 11,//*,000

c. P 11,2&,/00

d. P 11,2*6,000

11.

Purc%ases

 

a. P/,8&!,000

b. P

/,/&/,/00

c. P

/,!!*,2/0

d. P /,10!,000

12.

alaries>'pense

 
 

a. P!,2&2,/00

b. P

!,0/,000

c. P

2,6//,000

d. P 2,/6/,000

1!.

3a'esandlicenses

 
 

a. P2/0,&/0

b. P2!0,/00

c. P21&,000

d. P20!,/00

1.

nsurancee'pense

 
 

a. P1*&,&/0

b. P1&,000

c. P1/2,2/0

d. P101,/00

1/.

<tilitiese'pense

 
 

a. P2/6,/00

b. P2!1,&/0

c. P220,/00

d. P1*/,&/0

16.

"oubtulaccounte'pense

 
 

a. P20,&/0

b.P10,!&/

c.P6,/&/

d.P0

1&.

"epreciatione'pense

 
 

a. P2*,!&/

b. P2*,!&/

c. P2!*,/!1

d. P210,000

18.

Costosales

 

a. P/,!86,/00

b. P /,!68,/00

c. P /,1/0,2/0

d. P ,06/,000

1*.

>stimatedlossromlawsuit

 
 

a. P,000,000

b. P!,000,000

c. P/00,000

d. P0

SS oo ll uu tt ii oo nn

 

1&

#

 P415'000 gien in ite! no& 1

 

2&

 P3*4'250 -P415'000 ; P20'(50 ite! no& 2.

3&

#

 P1'2(4'000 gien in ite! no& 4

4&

 P152'250 x 4/12 P50'(50

5&

7urnitureixtures 2'06)'500

ease<oldi!proe!ents ()('500

ess% #ccu!ulated depCn;1/1/02

2002 ,epreciation ; i!proe&

- 56('000.

3*'3(5.

-

25

 

2002,epCn;urniture

-210'000

.

6&

#

arryingalue;2002 2'03*'625  P533'(50 gien in ite! no& 3  P6*'(50 gien in ite! no& (

(&

)&

#

alaries;P40'000x12 P4)0'000 

iingallo$ance P4'3(5x 52$eeBs =otal

22('500

*&

apita;lbeg&

2'1)0'500

F!ission F!ission o o prepaid accrued expense expenses in in 2001 2001 =otal

 

-

(0('500 45'500 45'000 .
(0('500
45'500 45'000 .

2'1)1'000

10& 

ales;cas<basis

11'55*'000 11'42('500  415'000  2)3'500

11'55*'000

11'42('500

 415'000

 2)3'500

#Ge;Rnd

#b;Reg

ales;accrualbasis

11& 

Purc<ases;cas<basis

5 '33*'250

#Ge;Pnd

 533'(50

#b;Peg

 2*('500

5 '5(5'500

Purc<ases;accrualbasis

12& ,

alariesperrecord

3'045'000

alariesot<eproprietorH #dusted alaries

4)0'000
4)0'000

 2'565'000

H

alaries o t<e proprietor or a partners<ip is considered as part o proit distribution

13& 

=axesandlicenses;cas<basis G#ccruedtaxes;end  #ccruedtaxes;beg =axes andlicenses;accrualbasis

 2 1('000  33'(50  20'250  230'500

 2 1('000  33'(50  20'250  230'500

14& 

Insuranceexpense;cas<basis

 1 52'250

GPrepaidinsurance;beg

45'500

Prepaidinsurance;end

50'(50

Insuranceexpense;accrualbasis

 14('000

15& 

:tilities;cas<basis

 220'500

G#ccruedutilities;end

36'000 24'(50

36'000

24'(50

#ccruedutilities;beg

:tilities;accrualbasis 16& # ; gien in ite!  2 1(&  ; reer to +uestion  5 ?uestion 1)& #

 231'(50

 

eginninginentory

 1'0)5'000

Purc<ases Endinginentory

osot ales

-1'2(4'000 5'5(5'500

.

5'3)6'500

-1'2(4'000 5'5(5'500 . 5'3)6'500

1*&  ince t<ere is a co!pre<ensie insurance policy or t<e da!age' only P500'000 $ill be c<arged as loss -3@ ;

2&5@.

PPrroobblleemm 1111

ou %ave been enaed to e'amine t%e inancial statements o Mince Corporation or t%e year ended "ecember !1, 2006. n t%e course o your e'amination, you %ave ascertained t%e ollowin inormation-

1. Mince uses t%e allowance met%od o accountin or uncollectible trade accounts receivable. 3%e allowance is based upon ! o past due accounts 5over 120 days and 1 o current accounts as o t%e close o eac% mon t%. "ue to t%e c%anin economic conditions and climate, t%e amount o past due accounts %as increased siniicantly, and

26

manaement %as decided to increase t%e percentae based on past due accounts to /. 3%e ollowin balances are available-

+s o Nov. !0, 2006

 

+s o "ec. !1, 2006

"ebit

Credit

"ebit

Credit

12,00

:

P!0,000

:

0

:

!0,000