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2nd Flr, GF Partners Bldg, 139 H.V. dela Costa, Salcedo Village, Makati City

AUDITING PROBLEMS

Accounting for Changes and Correction of Errors

Prof. L.O. Aristorenas

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Definition of Terms  Accounting policies specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting the financial statements.  Fundamental errors are errors discovered in the current period with such significance, that the financial statements of one or more prior periods can no longer be considered to have been reliable at the date of their issue. Reasons why Accounting Changes Occur: 1. The accounting profession may mandate that a new accounting principle is to be used. 2. Changing economic conditions 3. Changes in technology and in operations 4. New experience or new information may prompt companies to change its estimate of revenues or expenses. TYPES OF ACCOUNTING CHANGES 1. Change in Accounting Principles This is a change from one generally accepted accounting principle to another generally accepted accounting principle. Adoption of a new principle in recognition of events that have occurred for the 1st time is not a change in accounting principle. There is no change in accounting principle when the depreciation method adopted for a newly acquired asset is different from the method or methods used for previously recorded assets of similar class. A change from a principle that is not generally accepted to one that is generally accepted is considered to be an error correction than a change in accounting principle. Accounting Procedure: Benchmark treatment A change in accounting policy/principle should be applied retroactively unless the amount of any resulting adjustment that relates to prior periods is not reasonably determinable. Any resulting adjustment should be reported as an adjustment to the opening balance of the retained earnings. Comparative information should be restated unless it is impracticable to do so. 2. Change in Accounting Estimate This is a change that occur as a result of new information or acquisition of additional experience. Changes in estimates are viewed as normal recurring corrections and adjustments or the natural result of the accounting process. Retroactive treatment is prohibited. Accounting Procedure: a. Report current and future financial statements on the new basis. b. Present prior period financial statements as previously reported. c. Make no adjustment to current period opening balances.

Restatement is necessary even if a correcting journal entry is not required. Accounting Procedure: 1. Intentional errors are significant because of the presence of fraud or intent to deceive. . 3. It involves the improper classification of revenues and expenses accounts. evading taxes. If detected in the period the error occurred. the change should be accounted for as a change in estimate rather than a change in principle. adjust errors by making prior period adjustments directly to Retained Earnings or restate the beginning balance of the Retained Earnings account. Oversight e. If the error is discovered in a subsequent year. also called fundamental errors are reported in the current year as adjustment in the beginning balance of the Retained Earnings account. Changes in estimates which are not prepared in good faith TYPES OF ERRORS 1. Errors may be intentional or unintentional. Mathematical mistakes c. Classifications of Combined Balance Sheet and Income Statement Errors: a. manipulating or window-dressing the company's financial statements. It has no effect on the Balance sheet and in the Income Statement. 2. A change from an accounting principle that is not generally accepted to an accounting principle that is generally accepted. They result from carelessness or ignorance on the part of the company's personnel or it may result from poor internal control. hence. A reclassifying entry is necessary only if the error is discovered in the same year it is committed. Examples of Accounting errors: a. b. Income Statement Errors This type of error affects only the presentation of nominal accounts in the Income Statement. no classification entry is necessary. Incorrect classification of expense as an asset or vice versa g. If detected in subsequent period. Counter Balancing Errors  Errors which if not detected are automatically offset or corrected over two periods. 3. The risk of material errors may be minimized through the installation of good internal control and the application of sound accounting procedures. Balance Sheet Errors This type of error refers to improper classification of real accounts such as assets. These errors are made for the purpose of concealing fraud or misappropriation. Prior period adjustments. Prior period statements should be restated to correct the error when comparative statements are prepared. They have no effect on net income 2. or if an asset is affected by both a change in principle and a change in estimate during the same period. Mistake in the application of accounting of accounting principle d. correct the accounts through normal accounting cycle adjustments.2 NOTE: Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred. Unintentional errors were not deliberately committed. only the details of the Income Statement are misstated. liabilities or stockholders' equity accounts. CORRECTION OF ERRORS No company whether large or small is immune from errors. Combined Balance Sheet and Income Statement errors This affects both the balance Sheet and the Income Statement because they result in the misstatement of net income. Correct all previously presented prior period statements. Misuse of facts f.

GUIDELINES IN ERROR ANALYSIS 1. 2004 was deposited and recorded on the same day by a credit to sales. no entry is necessary. Prepaid expenses 3. 4.500 for freight charges on merchandise purchased on December 18. 2004. . What is the necessary adjusting or correcting entry? END PROBLEM 1 In your examination of the financial statements of GRISHAM CORP. 1. This type of error is carried over to the subsequent accounting period until corrected or until the balance sheet item involved is removed from the accounts by sales. 2003.000 had been charged to expense on January 01. for the year ended December 31. On December 31..  Books are closed 1. Payment of P4. What accounts are affected? 2. If the error is not yet counterbalanced. Deferred Income 4. This was in payment of Accounts Payable 3. Inventories to include the following a. Prepare the necessary adjusting entries. 5. Purchases b. Sales 2. you discovered the following errors. b. Accrued expense 5. If the error is not yet counterbalanced. 2004 was debited to freight out account. Improvements on building of P100. Non Counter Balancing Errors  Errors which take longer than two periods to correct themselves. What was the erroneous entry made or what was the entry omitted? 4. Counterbalancing errors include the misstatements of the following accounts: 1. Accrued Income GUIDELINES  Books are open 1. 2.3   Effect: Net Income of two successive periods are misstated. Interest collection from a notes receivable amounting to P3.000 which had been outstanding for more than six months was included in the list of outstanding checks. the physical count was overstated by P5. If the error is already counterbalanced and the company is in the second year. The amount of misstatement in one period is equal to but opposite in effect in the income of the next period. an entry is necessary to adjust the beginning balance of the Retained earnings and correct the current period. What is the correct entry? 5.500 which was received on December 30. an entry is necessary to correct the current period and to adjust the beginning balance of the Retained earnings. retirement or other means of disposal. 2. A staled check of P12.000. an entry is necessary to adjust the present balance of the Retained earnings. Improvements have a life of 5 years. How were these accounts affected? Was there an understatement or an overstatement? 3. 2004. 2. If the error is already counterbalanced.

The cash received was recorded as other income in 2004. 13.000 P300. These checks were released on January 4. Payments are recorded as revenue when received. As a result. GRISHAM CORP.31. were installed in 2003 and were charged to repairs in 2003. PROBLEM 2 In early 2005. KEVIN INC. DATE OF LOAN AMOUNT MATURITY DATE 11.000 KEVIN INC. 2003.000 3. an equipment costing P70. records interest expense when the loans are repaid.04 05. the company received a P90. Information relating to bad debts and sales is as follows: Estimated Bad Debt Expense Actual Year Sales (% of Sales) Bad Debts 2001 P 87.31. 2005. Amounts received but unearned at the end of each of the last three years are shown below.01. A check for P20. but was recorded by the bookkeeper as P2.000. On the last day of 2004. 4.000 was recorded in 2004 2. goodwill estimated by the Board of Directors at P300. A check was cleared by the bank as P5.000. receives subscription payments for annual (one year) subscriptions to its magazine. 2003. 3. books are still open b. 11. failed to record the unearned revenues in each of the three years.000 prepayment from a tenant for 2005 rent of a building.000 shares of P 100 par value capital stock for P550.05 KEVIN INC.01.000 collection from Smart Co.03 50.04 80. issued 5. 9. indicate the effect on net income for both 2003 and 2004 and the necessary adjusting entries. It was recorded as rent revenue. On December 29. At the date of sale. 2002 2003 2004 Unearned revenues P240. KEVIN INC. assuming : a. frequently borrows from the bank in order to maintain sufficient operating cash. On January 01. while reviewing KEVIN INC. GRISHAM CORP.31. the equipment has an accumulated depreciation of P43.4 6.000 07. This was in payment of an employee cash advance.s accountant discovered several errors. 14.000 P352. 10. was correctly recorded in the general ledger but was erroneously credited to the subsidiary ledger account of Smurf Corp. 2003.200 on December 05.000 10. books are already closed 1.000 for three years paid in January 2003 was charged to expenses in 2003. KEVIN INC.000 4. KEVIN INC.500. The proceeds were credited to the Capital Stock account. 2003 and is being depreciated using the straight line method. 8.200 2002 123. A P15. Pollution control devices costing P84.690 2. Assume tax rate of 32%.000 was set up by a credit to Retained Earnings.000 01. For each of the error listed below.000 which is high in relation to the cost of the original equipment.04 150. 2004. 7.000 was sold for P35. repaid each loan on its scheduled maturity date. A customer's deposit of P60. On December 31.000 for goods to be delivered in January 2005 was deducted from accounts receivable. 2005. KEVIN INC.850 2003 147. has estimated bad debts using the percentage-of-sales method since their business began operations in 2002.000 on January 14. issued checks to its creditors amounting to P75. The original equipment referred to has a remaining useful life of 6 years on December 30.222 .610 P1.01.000 from a customer to apply to his account was received on December 30.04 02. interest expense of P15. 12.750. Insurance premium of P45. 2004 but was not recorded until January 4.’s 2004 financial records. 2004. with interest payable at maturity.410 3. 15.000 P2. The following loans were at 12% interest rate.

000 in 2002. On working capital at December 31. 2003. __________________5. 31. 2003. __________________9. __________________8. During the audit you found the following: Year ending December 31 2002 2003 2004 Omissions from the books: a. P43. 31. On Retained Earnings after closing at Dec. 6. PROBLEM 3 You have been engaged to audit the accounts of EFU CORP. Dec.200. __________________12. AMOUNT a. Dec. Unearned income. __________________2. __________________7. __________________3. 2004 of the omission of accrued income at the end of 2002. No adjusting entry was made in 2003 or 2004. On 2004 net income of the omission of both accrued expense and unearned income at the end of 2002. 31 3. 31. 2003. No adjusting entry was made on December 31. __________________11. for P39. 31 P18.150 c. 2004 of the omission unearned income at the end of 2002.640. 9. __________________1.000 d. 10.000 P27. __________________10. On Retained Earnings after closing at Dec.500 13.000 was held by KEVIN INC. Merchandise costing P24.000 was sold for P40. 2003 and 2004. 2003 and 2004 when considered together.500. 2003 and 2004. Accrued expenses. On working capital at Dec. Dec. 2003 but the sale was recorded in 2004. 31. 2004 of the omission of unearned income at the end of 2002.720. No depreciation expense was recorded during 2003 or 2004. Sales for the year totaled P1. 2003 and 2004 when considered together. KEVIN INC.000 on December 29. On Retained Earnings after closing at Dec. Prepaid expenses. __________________4. for P57. 2004 on the omission of prepaid expenses at the end of 2002 and 2003.000 P9. 2003 and 2004 when considered together. Equipment with a ten-year life was purchased on January 1. Dec.000 in 2003 and P92. The merchandise was shipped FOB shipping point and was not included in ending inventory. Beginning merchandise inventory (January 01. __________________6. 7. On 2004 net income of the omission unearned income at the . b. uses the straight-line method for recording depreciation. A one-year note receivable of P96. beginning October 1.000 54. 2003. A two-year fire insurance policy was purchased on May 1. 2003) was understated by P8.000 and actual bad debts amounted to P3. On 2004 net income of the omission of accrued income at the end of 2002. The entire amount was debited to Prepaid Insurance.000 b. Indicate the amount of over or under statement.000 81. 2004 of the omission of accrued expenses at the end of 2002. for the first time in 2004. Accrued expenses omitted at the end of the year are P43. Assume that the equipment has no salvage value and that KEVIN INC. proposes changing their estimation of bad debt expense from 3 percent of sales to 2 percent. U for understated or X for no effect. 2004 of the omission of prepaid expenses at the end of 2003 and 2004.050 3.000 in 2004. Payment of the 10 percent note and accrued interest was received upon maturity.500 REQUIREMENTS: EFFECT For each number indicate the effect by writing O for overstated. On working capital at Dec. 31 31. On 2003 net income of the omission of accrued expenses at the end of 2002.5 At the beginning of 2004. 5. On the 2004 net income of the omission of prepaid expenses at the end of 2003 and 2004.500 22. 8. On the 2003 net income of the omission of both accrued income and prepaid expense at the end of 2002 and 2003. 31. 2003 and 2004.630. Accrued income. The company had already made an adjustment based on the old rate.600 4. 31 108.

while reviewing THOMAS CORP. 2002 of the omission of accrued income at the end of 2002.750 applicable for the fourth quarter of 2003 were paid and charged to expense on January 20. 2004 due to lack of sufficient funds.250. 11. 4. 2004. For each of the error listed below. 6. The amount of cash received was credited to sales. an P8.750 on January 1. Sales on account of P25. indicate the effect on net income . Records of Mervyn Company reported the following net Income. 31. 12. 2003 was overstated by P 59.625 in 2003 was not recorded until the following year but was included in the year's inventory. Office supplies are expensed as purchased. Insurance premium for a three year period amounting to P15. The company still provided for depreciation based on the old estimate.750 was returned by the bank on November 3.6 end of 2002 and 2003.250.000 and with an accumulated depreciation of P75. 2004 indicated that several errors were committed as follows: 1. 2003 and 2004 when considered together. 8. __________________14. In addition. 14. 2. Prepare a worksheet showing the corrected income for 2003 and 2004. 2004 but not recorded until January 4. Purchase of merchandise in the amount of P10. 3. Inventory on December 31. __________________15. Proceeds from sale was credited to the Equipment account. 2003 P 546.500 per year. Footings and extensions showed that the inventory on December 31. The company's gross profit is 20% of cost.000 bought on June 30. 2004.000 in December 2004 were recorded in 2005. 31.000 was charged to expense on January 1. On Retained Earnings before closing at Dec. The proceeds from sales on this machinery costing P437.250 from a customer was received on December 31. 13. 5.750 invoice for office supplies was charged to purchases.250 on notes receivable was not recognized on December 31. Adjustment was made the following year. 2004 was overstated by P56. 2004 of the omission of both accrued expenses and unearned income at the end 2002. 2004 but the sale was not recorded until 2005. In August 2004. Taxes of P18. 2004 assuming: a. 2003.000 was sold for 68.875 2004 625. Prepare the necessary adjusting entries on December 31. 2005.000 REQUIREMENTS: 1. A fully depreciated machinery was sold on December 31. On the 2004 net income of the omission of accrued expenses at the end of 2002. An equipment costing P125. 7. __________________13. A collection of P31. Depreciation computed on the building for the years 2003 and 2004 was overstated by P12. 9.375. A customer's check of P8. On December 20. 2001 was computed based on an estimated useful life of 8 years. 2003 and 2004 when considered together. a cash advance of P37. On Retained Earnings after closing at Dec. 15. Interest of P6. 2003 and no adjustment was made on year end. its accountant discovered several errors. depreciation was recorded for the equipment for 2004 at the rate of 10%. Books are still open b. Books are closed Problem 5 In early 2005.500 from a customer was received for goods to be delivered in January 2004. 2004. 2. The engineers estimated that the useful life of the asset should be revised to 10 years effective 2004. 10. Depreciation of equipment costing P15.'s 2004 financial records. PROBLEM 4 An examination of the accounting records of Mervyn Company for the year ended December 31.500 was P31.

1. Goods sold on account in 2003 amounting to P5. Understatement of depreciation expenses 15. Certain items of ending inventory amounting to P5.000 18.250 31.250 for January 2004 rent was received and recorded as revenue at the end of 2003.000 3.000 in 2003 on a note payable was not recorded until it was paid in 2004. 9. 4. Sale of such goods in 2004 and collections on such sales were recorded as credits to receivables established with consignees in 2003. Failed to record purchase on account and mdse properly included in ending inventory 5.500 2003 ( 125. Interest accrued of P4.000 Problem 6 For three years.000 5. 2.000 6. The company reports on a calendar year basis and computes depreciation to the nearest month.000 were not recorded as sales until 2004. Failed to recognize unearned revenue 4. REQUIREMENTS: Determine the effect of the above mentioned errors on the balance sheets and the income statement prepared in 2003 and 2004 and compute for the corrected income assuming reported income are as follows: 2003 P 500.000 10. Goods shipped to consignee amounting to P2.500 and estimated to have a useful life of 10 years.7 for both 2003 and 2004 assuming no correction was made and the company uses the periodic system of inventory.250 in 2003 was credited to Gain on sales-Machineries 2003 year end purchases of P10. Failed to recognize gain on sale of land.000 but unpaid in 2003 were not recorded until paid in 2004. 7. Cost of the asset purchased in October of 2001 was P12.250 18.875 were accidentally not counted at the end of 2003.500 in 2003 were reported as sales.500 in 2003 was not recorded until 2004. Land credited for the proceeds 75. 5.750 875 - 2004 . Overstatement of ending inventories 36. A check of P6.250 50. 12. Interest receivable of P1. Insurance costs incurred amounting to P15. Reported net income and listing of the error appear below: Unadjusted net income (loss) 150. The inventory associated with these purchases was omitted from the ending inventory count in 2003.375 was taken in 2003 for equipment sold in April 2003.000 8.000) 500 11.750 750 22. 10. 250 2.000 7. Machinery was sold in May of 2004. The company follows the straight line method of computing depreciation. 3.250 2002 500. BLUEBIRDS MDSE.000 375 28. Failed to record accrued salaries 16. but the company continued to deduct depreciation for the remainder of 2004 although the asset was removed from the books in May. 6.000 60.500 of inventory were not recorded until the beginning of 2004 although the inventory was correctly counted at the end of 2003. No depreciation amounting to P4. failed to recognize accruals. 8. 2003 year end purchase of P7. prepayments and other transactions in its accounts.000 were not recorded until the beginning of 2004. Checks written in December and mailed on January 3 of the following year. Goods in the hands of the consignee at the end of 2003 were not recognized for inventory purposes. The total of one week's sales amounting to P2.000 2004 375.750 6. 11. Failed to recognize unused supplies at the end of year 3.000 1. Worthless accounts written not written off by year end 625 9. Failed to record accrued commission expenses 25.

MYSTERYSCOT MANUFACTURING purchased a machine on January 1. 5. 2003. At the time.) The company has recorded depreciation charge of P1. 5. 2004. Company policy is to take one half years depreciation on all asset acquisitions or disposals during the year.000.end computed on a monthly basis. MYSTERYSCOT MANUFACTURING acquired a machine in exchange for 1. DON JOHN CORP. You are examining the financial statements of DON JOHN CORPORATION which ends on December 31. that the machine had an estimated useful life of 8 years from the date of acquisition with no residual value. 2. The inventory at December 31. Enter the effect of the errors in the solution guide below. for 2003 accounts of P350 and for 2004 accounts of P750. 4. The company used the double declining balance method of depreciation. 2002 was sold for P26. Goods received in December 2004 were recorded as purchases when paid in 2005. On May 01. Goods received in January 2005 were recorded as purchase on account in December 2004. Goods received in December 2004 were recorded as purchases when paid in 2005. The goods were included in the 2004 ending inventory. 3. Goods received in January 2005 were recorded as purchase on account in December 2004. you discovered the errors below.500. The goods were excluded from the 2004 ending inventory. The machine is being depreciated on a straight-line basis. The machine's remaining useful life was estimated to be 5 years with a residual value of P 1.000 cash on July 1.000. The company depreciates equipment at 10% a year. 2004. On January 1. uses the physical inventory system of accounting for inventory.000. The machine was recorded in the accounts at P100. MYSTERYSCOT MANUFACTURING purchased a machine on January 1. the machine had an estimated useful life of 6 years with no residual value. 1. management determined as a result of additional information. 2001 for P1. 2004.000. the company decided to change its depreciation method from double declining balance to straight line. No allowance had been set up for estimated uncollectible receivables. U-Understated X-No effect . 4. Accounts have been written off to bad debts expenses as follows: In 2003 In 2004 2003 accounts P 200 P 1. The proceeds from the same were credited to the equipment account. 2002. Equipment acquired by MYSTERYSCOT MANUFACTURING for P30. Depreciation is taken up at year.8 Requirements: Prepare a schedule to correct the reported net income for each year and the adjusting entries to correct the books at the end of 2004.500 on this machine from acquisition to the end of the current period. Depreciation of P1. The goods were excluded from the 2004 ending inventory.000.600 was recorded in 2004. 6. The inventory at December 31. 2004 is overstated as a result of the inclusion of goods acquired on consignment. 2004 is understated as a result of errors in physical count. 2000 for P50. The company decided to set up such an allowance for the estimated probable losses as of December 31. The goods were included in the 2004 ending inventory.000 2004 accounts 800 3. It was also decided to correct the charge against each year so that it shows the losses (actual and estimated) relating to that year's sales. Problem 7 1. REQUIREMENT: Journal entries PROBLEM 8 INVENTORIES 1.000 shares of its own P100 par value common stock having a fair market value of P120 on this date. At the date of acquisition. 2. Use the following symbols: O-Overstated. it was determined that the machine has an estimated useful life of 10 years and an estimated residual value of P2. Machinery is depreciated on a straight line basis (no salvage value based on an estimated life of 10 years. On January 1. In the course of your examination.000 on June 30.

2004 Purchases ____ ____ ____ _____ _____ _____ Cost of Sales ____ ____ ____ _____ _____ _____ Net income ____ ____ ____ _____ _____ _____ Balance Sheet. 2005 Inventory ____ Accounts Payable ____ RE before closing ____ RE after closing ____ ____ ____ ____ ____ ____ ____ ____ ____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ Problem 9 Inventory Errors (Periodic Inventory System) 1. 2003 Inventory Accounts PAYABLE RE before closing RE after closing Income Statement. 4.2004 Sales Beginning inventory Ending inventory Cost of Sales Net income Balance Sheet.9 1 2 3 4 5 6 Income Statement.December 31. 2004 sales were recorded in 2003. 2003 sales were recorded in 2004. goods were excluded from the 2003 inventory. goods were excluded from the 2003 inventory. 2004 Inventory ____ ____ ____ _____ _____ _____ Accounts Payable ____ ____ ____ _____ _____ _____ RE before closing ____ ____ ____ _____ _____ _____ RE after closing ____ ____ ____ _____ _____ _____ Income Statement.December 31. 3.December 31.2005 Purchases ____ ____ ____ _____ _____ _____ Beginning inventory ____ ____ ____ _____ _____ _____ Ending inventory ____ ____ ____ _____ _____ _____ Cost of Sales ____ ____ ____ _____ _____ _____ Net income ____ ____ ____ _____ _____ _____ Balance Sheet. 2003 sales were recorded in 2004. goods were included in the 2003 inventory. 2004 Inventory Accounts Payable RE before closing RE after closing ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ _____ _____ _____ _____ _____ _____ _____ _____ _____ ____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ _____ .2003 Sales ____ _____ _____ _____ Ending inventory ____ _____ _____ _____ Cost of Sales ____ _____ _____ _____ Net income ____ _____ _____ _____ ending ending ending ending Balance Sheet. goods were included in the 2003 inventory.December 31. A B C D Income Statement. 2. 2004 sales were recorded in 2003.

The records are in agreement with the following balance sheet: Hassan Inc.500 192.500 437. The machine was depreciated by the double declining balance method and the carrying amount of the machine was P268.000 A review of the records of the corporation indicates that the errors and omissions listed in the table below had not been corrected during the applicable years. On January 1.500 10.000 15. Brandy Corp. Balance Sheet December 31.310 131.500 2.250 875 96.250 7.500 Total 1. P 26.880 b. 2004? a.000 a machine with a useful life of 10 years and no salvage value. reports on a calendar-year basis.250 No dividends were declared during the years and no adjustments were made to retained earnings.500 c. P 53.600 c. Breton Company changed to the straight line method on January 01. Prepare a corrected balance sheet for December 31. and its ending inventory was overstated by P91. P 33.250 2003 140. Overstated by P45. 2003.10 Problem 10 You have been engaged to prepare the corrected financial statement figures for HASSAN INC.000 LIABILITIES AND CAPITAL Accounts payable 175.050.750 1. REQUIREMENTS: Working paper to compute for the corrected income for the years 2002. 2003 and 2004. As a result.500 b.750 3.500 d.760 3. 2004.500 Common stock 350.500 12. What would be the depreciation expense on this machine for the year ended December 31.500 2002 122.000. P 42.000 1.500 5.000 Notes payable 52.000 8. Overstatement of inventory Understatement of inventory Prepaid expense Unearned revenue Accrued expenses Net income as reported 2001 105. Understated by P45. Sean Company’s cost of goods sold for 2004 was: a. 2002. MULTIPLE CHOICE PROBLEMS: 1.000 Retained earnings 472.750 113. 2004.500 227.050.800 on December 31.500.000 d. Sean Company’s beginning inventory at January 1.750 2004 157. Breton Company purchased for P420. 2004 was understated by P45. 2004 ASSETS Cash Accounts receivable Notes receivable Inventory Total 192. Its 2004 and 2005 financial statements contained the following errors: 2004 2005 . Understated by P136.500 1. Overstated by P136.

Rodney Company determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of P36. Payments are recorded as revenue when received.500. Amounts received but unearned at the end of each of the last three years are shown below: 2003 2004 2005 Unearned revenues P120. Globe Corporation now believes 1% of sales to be a better estimate of warranty costs.700 5. An accounting change was made in 2001 to reflect this additional data. P 154. Inc. P 321. P 100.000. net of accumulated amortization on December 31. 2005 income would be: a. As a result of the omission. Kincaid's prepaid advertising and promotion costs totaled P250. The adjustment for the effect of the change in accounting principle should result in a net charge against income in the income statement for 2005 of a.000 c.000. a.000 6. How much should be reported in 2004 as warranty expense.000 As a result of the above errors.300 b.000 12. overstated by P26.000 b. Laden Company purchased a patent for P535. P 264.000 at December 31. Due to technological advance in production at the beginning of 2004. On January 01. P 240. overstated by P22. P 150. P 367. On January 01. Sales for 2004 was P8. overstated by P4.000 d. which was made for both financial statement and income tax reporting purposes. understated by P146. Bart. overstated by P16. 2016.000 d.000 6. P 0 b.000 4. P 87.200 c. receives subscription payments for annual (one year) subscriptions to its magazine. P 219. P 392.000 8.000 7. 2004. 2004 of: a.000 P176. Rodney Company purchased a machine for P396. Kincaid can justify the change. P 175. P 231.000 . Assume that the income tax rate is 40 percent for 2004 and 2005.000 P150. 2004.000 were reported in 2002 and 2003 respectively.000 d.000 b. Globe Corporation offers a 3 year warranty for its products. On January 1. Previously. 2004? a.000 and depreciated it using the straight line method using an estimated useful life of 8 years with no salvage value.000 d. It previously estimated warranty costs to be 2% of sales. overstated by P24. 2005 income was: a.000 c. Laden Company determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition.000 4. Effective January 2.000 Bart failed to record the unearned revenues in each of the three years. adopted the accounting principle of expensing advertising and promotion costs as they are incurred. advertising and promotion costs applicable to future periods were recorded in prepaid expenses.000 d.000 and P168. Kincaid Co. The patent is being amortized over its remaining life of 15 years expiring January 01. P 250. overstated by P146. What amount should be reported in the Balance sheet for the patent.750.11 Over (under) statement of ending inventory Understatement of depreciation Failure to accrue salaries at year end P10. 2001.500 b. During 2004. 2005.000 c.000 8.000 c.000 b.000 P 4. P 378. 2001.000 c. Warranty cost of P140. understated by P26. The accumulated depreciation for this machine should have a balance at December 31.

fully depreciated machinery was sold for P6.200 c. P 369.000. The entire amount was charged to expense in 2004.750 24. P 345.000 d.000 d. Badger did not recognize any depreciation for the machine in its 2004 financial statements. and no corrections have been made for any of the errors. but this amount was charged erroneously to repairs expense. P 30. In addition.500 Purchase of mdse not recorded but included in the year end inventory 45. 2004.750 c. P 525. at a cost of P120.400 10.750 14. What amount should Adger record for depreciation expense on this machine for 2005? a. Adger Corporation purchased a machine for P150. 2005? a.250 loss on sale of equipment in 2004 was erroneously debited to retained earnings. P 60.400 cash. 2005.12 d.720 12. P 241.600 c. 2005. P 37. Kentucky Enterprises purchased a machine on January 2.000. What is the correct net income for 2004? a. Gray Company purchased for P240. P 24.500 13. and 2006. P 552.250 11. P 0 b.750 was earned in 2004.500 d. P 531. Of the total P3. P 30.500 9. Jerry Company reported a net income of P525.750 d. P 19.750 b.750 c. The machine was depreciated by the double-decliningbalance method.000 b. Net income is understated by P12. on December 31. Your audit disclosed the following errors: Income received in advance in 2004 of P18. Net income is overstated by P3. P 507. 2004. Adger will depreciate the machine using the straight-line method using a five-year period with no residual value. On January 1.800 b.000 on January 1. P 363.000 will be earned in 2005 and the remainder in 2006.000 Adjusted net income for 2004 is: a.000 in 2004. P 15. Gray can justify the change. Your audit disclosed the following: 2004 2005 Overstatement of ending inventory 21. Gray changed retroactively to the straight-line method on January 1.250 Understatement of commission receivable 16. Lain Company reported net income of P375. An additional $50. and the carrying amount of the machine was P153. P11.000 11.750 Omission of depreciation 11.000 13. P 348.000 was spent for installation. P9. Adger discovered the problem during the preparation of its 2005 financial statements. Ignore income tax considerations.600 was prepaid in 2004 covering the years 2004. What is the total effect of the errors on 2005 net income? a.000 a machine with a useful life of ten years and no salvage value.600 on December 31. The machine has a useful life of five years and a salvage value of P20. Net income is understated by P1. An insurance premium of P3. What should be the depreciation expense on this machine for the year ended December 31. but the sale was not recorded until 2006.600 d.000 c.000 in 2004. 2003. Net income is overstated by P2. 2002.360 b. As a result of the error. . As a result of an error in its purchasing records. There were no other errors during 2004 or 2005. 2004.750 was credited to a revenue account when received.

500 Retained earnings at the end of 2002 amounted to P445. the sale was not recorded until January 2005 and the merchandise. On December 30.000 17.000 Understated by P11.000 before any audit adjustments. the end of the accounting period. The terms of the sale were net 30 days.500.000 2.200 2. 2004 income was understated by P50. 2004 and arrived at Steve Company on |January 05. P 125.000 understated P 8.000 overstated 2005 P10. Due to clerical error. 2004.700 P168. you determined that certain prepaid and accrued items were not recorded in prior years and in the current year as follows: 2002 2003 2004 Accrued expenses 4. Saugie’s cost of goods sold for the year ended December 31. P146. The merchandise was shipped on December 31. 15. You have verified that no dividends were declared in the two year period. Carnival Shipping bought a machine for P1.000 understated a.000 and 2005 income was overstated by P10.000. 2004.000 c. b. P 450. P 187. with no salvage value.13 Retained earnings at December 31.000 12. On January 1. 2002.000 19.000 overstated P25.000 8.500 d.250 to Steve Company. P 578. Saugie Corporation sold merchandise for P56. Retained earnings at December 31.500 d. P 445.300 b. As a result. the appropriate accounting change was made in 2005.000 P150. Accordingly.000 b.750 c.000 Prepaid revenues 1.500 6.000. 2004 was: Understated by P56. Combs. Carnival determined on January 1.500 Prepaid expenses 5. 2005 was understated by P30. Compute for the corrected Retained earnings balance as of December 31.750 Revenues receivable 3.000. As a result of additional information.000 and 2005 income was overstated by P6.250 Understated by P45.000 b. At that time. The income summary account for 2004 shows a credit balance of P150. . P 150. In the course of your examination of the accounts on December 31.200 P143. P 444. skid at a 25% markup on cost was included in Saugie’s inventory at December 31. this machine had an estimated useful life of six years. Inc. P126. 2005.200 P155. 2003 and 2004 are: 2003 2004 a. Retained earnings at December 31.000. P134.500 7. 2005 was understated by P38. 16.000 c. How much depreciation expense for this machine should Carnival record for the year ended December 31.250 Correctly stated Items 16 and 17 are based on the following information: You were engaged as an independent auditor of Thomas Corporation . 2004.000 d. with no salvage value. The corrected net income for the years ended December 31. 2005 was understated by P30. that the machine had an estimated useful life of eight years from the date it was acquired.000 and 2005 income was overstated by P6. P 250. DOB Shipping point.750 18. d. P122.000. is a calendar-year corporation whose financial statements for 2004 and 2005 included errors as follows: Ending Inventory Depreciation Expense 2004 P30. 2005. 2002. a.000. c. 2005 assuming Carnival uses the straight-line method of depreciation? a.000 while net income for 2003 was reported at P126.

P 3. P 165. b.000 overstatement 2004 108. Ignoring income taxes. P 255.000 decrease c.500 d.000 b. Understated by P45.000 22. for the year ended December 31.000 Inventory 90. P 27. Cost of sales 198. During 2004.000 d.500 and its ending inventory was overstated by P91.250 c.000 18.250.000 72. P 221. P 27. you discovered the following: a.000 cash advance from a customer for goods to be manufactured and shipped during 2005. 2006? a. Overstated by P45. Retained earnings 48. 2004. 2004.000 c..000 decrease 20. In the course of your examination of the financial statements of Correa Corp. P 150.000 21. Inventory at January 01. 2004 was understated by P56.000 decrease d. Koppell Co. Income reported for 2004 before reflecting any adjustment for the above information is P187. Overstated by P18. 2005. Understated by P198. The correct income for 2004 is: a. Retained earnings Cost of sales Inventory Inventory Cost of sales Retained earnings 18.000 increase b. As a result.750. d. P 7.000 understatement 2005 90.000 Cost of sales 42.500 c. Overstated by P198. Inventory at December 31. the company received a P15.500 b.500.000 72.000 overstatement As a result of the above undetected errors.000 Koppell Co.000 23. c.000 overstatement 2004 108. or December 31. made the following errors in counting its year-end physical inventories: 2003 P 60.000 90.000 d. .000 b. 2004 was understated by P45.000 c. a new client. 2003 for P22.000 understatement 2005 90. Tom Company’s cost of goods sold for 2004 was: a. Understated by P18. made the following errors in counting its year-end physical inventories: 2003 P 60. Tom Company’s beginning inventory at January 01.000. by how much should Coombs' retained earnings be retroactively adjusted at January 1. Understated by P136. 2004 had been overstated by P33. The whole amount was charged to expense in 2003.000 b.000 overstatement The entry to correct the accounts at the end of 2005 is a. The amount received was credited to sales. 90.500.000 Inventory 90.000 Retained earnings 108. 2005 income was a. An insurance policy covering three years had been purchased on January 01.14 Assume that purchases were recorded correctly and that no correcting entries were made at December 31.

Your audit of the accounts disclosed that the following accounts were not recorded: 2003 2004 Rent received in advance 22. P15. The auditor has found that Tamer had purchased another company in January 2002 and recorded goodwill of P75. Overstated by P136.000 Commission receivable 15.000 c.500 18.000 b. The net income for 2004 reported by the accountant of Abbas Company amounted to P634. Tamer should debit amortization expense of: Amortization expenses Retained earnings a.250 26. 2004. P45. P 0 P75.250 Equipment purchased at year end charged to expense (10 year life) 75.125 d. a.500 24.000 Prepaid interest 33.875 c. P25. P 598.000 in connection with this purchase. 2004.875 b.750 45. No amortization of goodwill had ever been recorded.000 Compute the correct income for the year ended December 31.750 14. P 613. P 681.500.000 Accrued salaries 13.625 Depreciation expense 26. 2004 financial statements.000 P30.500 30. The first examination of Tamer’s financial statements was made for the year ended December 31. For the December 31.15 d.375 25.000 P 0 d. It was determined that the goodwill had an estimated useful life of only five years because of obsolescence.000 P 0 END . P 655.

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