CORRECTION OF ERRORS

1. Which of the following is a non-counterbalancing error?

a. An understatement of purchases in the current period because the invoice was
received late.
b. Omission of depreciation for equipment purchased during the current period.
c. Omission of an adjustment to take up the unused supplies during the period.
d. Understatement of accrued salaries expense.

2. A company using a periodic inventory system neglected to record a purchase of

merchandise on account at year-end, this merchandise was omitted from the year-end
physical count, how will these errors affect assets, liabilities, and equity at year-end and
profit for the year?
Assets Liabilities Equity Profit
a. No Effect Understate Overstate Overstate
b. No Effect Overstate Understate Understate
c. Understate Understate No Effect No Effect
d. Understate No Effect Understate Understate

3. If at year-end an entity erroneously excluded some goods from the ending inventory and
also erroneously did not record the purchase, these errors would cause
a. No effect on profit, working capital and retained earnings.
b. The cost of goods sold and profit to be understated.
c. The ending inventory and retained earnings to be understated.
d. The ending inventory and cost of goods sold to be understated.

4. Which of the following errors could cause an understatement of owner’s equity and
overstatement of liabilities?
a. Failure to record the earned portion of rental revenue received in advance
b. Failure to record accrued interest on notes payable
c. Omission of adjusting entry for depreciation of some machineries
d. Understatement of ending inventory due to non-conclusion of goods still in the hands of
the consignees

5. During 2017, Grow Company discovered that the ending inventories reported on its
financial statements were incorrect by the following amounts: 2015 – P60, 000 understated;
2016 – P75, 000 overstated. Grow Company uses the periodic inventory system to ascertain
year-end quantities that are converted to peso amounts using the FIFO method.
By how much would retained earnings at January 1, 2017 be misstated prior to any
adjustments for these errors and ignoring income taxes?
a. P75, 000 overstated
b. P75, 000 understated
c. P15, 000 overstated
d. P15, 000 understated
6. After the issuance of its 2016 financial statements, Glow, Inc. discovered a computational
error of P150, 000 in the calculation of its December 31, 2016 inventory. The error resulted
in a P150, 000 overstatement in the cost of goods sold for the year ended December 31,
2016.

In October 2017, Glow paid the amount of P500, 000 in settlement of litigation instituted
against it during 2016. The loss was recognized in 2016, because it was considered probable
when the financial statements for 2016 were prepared. Ignore income taxes.

By how much should the December 31, 2016 retained earnings balance be adjusted n the
2017 statement of changes in equity?
a. P150,000 increase
b. P150,000 decrease
c. P350,000 increase
d. P350,000 decrease

7. Om January 21, 2016, Plow Corporation acquired a machine at a cost of P200,000. It was to
be depreciated on the straight line method over a five-year period with no residual value.
Because of a bookkeeping error, no depreciation was recognized in Plow’s 2016 financial
statements. The oversight was discovered during the preparation of Plow’s 2017 financial
statements.

What is the depreciation expense on this machine for 2017?

a. P 0
b. P40,000
c. P80,000
d. P120,000

8. The December 31 year-end financial statement of Crow Company contained the following
errors:
2016 2017
Ending Inventory P300, 000 understated P27, 000 overstated
Depreciation Expense 6,000 understated

Insurance premiums of P22,500 were paid in 2016 covering the years 2016, 2017 and 2018.
The entire amount was charged to Insurance Expense in 2016. Likewise, on December 31,
2017, fully depreciated machinery was sold for P48, 000 but the cash sale was recorded only
in January 2018. There were no other errors during 2016 and 2017 and no correcting entries
were made for any of these errors. Ignore income tax considerations.
What is the total effect of the errors on the 2017 profit?
a. P16,500 overstated
b. P16,500 understated
c. P24,000 overstated
d. P13,500 understated
9. Use the same information in No. 8. What is the overstatement or understatement in Crow’s
working capital at December 31, 2017 due to errors?
a. P28,500 understatement
b. P28,500 overstatement
c. P36,000 understatement
d. P36,000 overstatement

10. Use the same information in No. 8. What is the total effect of the errors on Crow’s retained
earnings balance at December 31, 2017?
a. P52,500 understated
b. P30,000 understated
c. P22,500 understated
d. P22,500 overstated

14. Flow Company is a calendar-year corporation. Its financial statements for the years 2017

and 2016 contained errors as follows:

2017 2016
Ending Inventory P10, 000 understated P30,000 overstated
Depreciation Expense 8,000 understated 25,000 overstated

Assume that the proper correcting entries were made at December 31, 2016. By how much
will 2017 profit before income tax be overstated or understated?
a. P2,000 understated
b. P5,000 overstated
c. P32,000 understated
d. P27,000 understated

15. Use the same information in No. 14. Assume that no correcting entries were made at
December 31, 2016. Ignoring income tax, by how much will retained earnings at December
31, 2017 be overstated o understated?
a. P2,000 understated
b. P5,000 overstated
c. P32,000 understated
d. P27,000 understated

16. Use the same information in No. 14. Assume that no correcting entries were made at
December 31, 2016 or December 31, 2017. Ignoring income tax, by how much will working
capital at December 31, 2017 be overstated o understated?
a. P5,000 overstated
b. P10,000 overstated
c. P10,000 understated
d. P17,000 understated
17. Accrued wages of P8, 000 and prepaid insurance of P2, 000 were not recorded at December

31, 2016. Neither of these errors was discovered or corrected. The effects of these errors
would cause
a. 2017 profit to be understated by P10, 000 and December 31, 2017 retained earnings to
be understated by P2, 000.
b. 2016 profit December 31, 2016 retained earnings to be understated by P8, 000.
c. 2016 profit to be overstated by P6, 000 and 2017 profit to be understated by P6, 000.
d. 2017 profit and December 31, 2017 retained earnings to be understated by P6,000 each.

18. Throw Company began operations on January 1, 2016. Prior to any adjustments, the
retained earnings account is reproduced below.
Debit Credit Balance
01/01/16 - - 0
12/31/16 Profit for the year 1,200,000 1,200,000
08/31/17 Dividends paid 400,000 800,000
12/31/17 Profit for the year 1,500,000 2,300,000

The company failed to properly recognize accruals and prepayments. Selected accounts
revealed the following information:
2016 2017
Prepaid Expenses P80,000 P60,000
Accrued Expenses 25,000 40,000
Unearned Income 110,000 50,000
Accrued Income 70,000 100,000

What is the adjusted balance of Throw Company’s retained earnings at December 31, 2017?
a. P2,355,000
b. P2,370,000
c. P2,385,000
d. P2,570,000