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Unit 1. Analysis and Correction of Errors Handout Final t31516
Unit 1. Analysis and Correction of Errors Handout Final t31516
Asset
2015
Liability
RE,
before
closing
RE,
after
closing
NI
Asset
2016
Liability
RE,
before
closing
A
B
C
D
E
F
G
H
I
J
a. The company failed to record purchases of merchandise on account of P25,000 at
the end of 2015.
b. Sale of merchandise on account on December 30, 2015 amounting to P20,000 was
not recorded until the customer paid his account in January 2016.
c. Depreciation expense on equipment in 2015 was overstated by P10,000.
d. Paid one-year insurance premium of P24,000 effective April 1, 2015. The entire
amount was debited to expense account and no adjustment was made at the end of
2015.
e. On December 31, 2015, the Company acquired a parcel of land and a building at a
total cost of P500,000. The entire amount paid was debited to the land account. A
reasonable estimate of the cost that should have been allocated to the building was
P200,000. The building has an estimated life of 20 years.
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RE,
after
closing
f.
Failure to record supplies on hand at the end of 2015. The supplies on hand
amounted to P5,000.
g. Understatement of 2015 ending inventory worth P24,000.
h. Failure to record accrued interest on notes payable at the end of 2015. Notes
Payable, principal amount, P100,000;interest rate, 10%;Acquired March 31, 2015
i. Failure to recognized unearned rent at the end of 2015 worth 12,000.
j. Goods received in December 2015 were recorded as purchases when paid 2016.
The goods were excluded from the 2015 ending inventory.
Problem 1-2 Effect Errors on Net Income, Retained Earnings and Working Capital
The income statement of Binsol Inc. showed the following net income:
2015 P1,750,000
2016
P2,000,000
An examination of the accounting records for the year ended December 31, 2016
revealed that several errors were made. The following errors were discovered:
a. Salary accrued at year-end were consistently omitted:
2015 P100,000
2016
140,000
b. The footings and extensions showed that the inventory on December 31, 2015 was
overstated by P190,000.
c. Prepaid insurance of P120,000 applicable to 2017 was expensed in 2016.
d. Interest receivable of P20,000 was not recorded on December 31, 2016.
e. On December 26, 2016 an equipment costing P400,000 was sold for P220,000. At
the date of sale, the equipment had an accumulated depreciation of P240,000. The
cash received was recorded as miscellaneous income in 2016.
f. A building which had a fair value of P1,200,000 was accepted from the city
government as a donation on January 1, 2015. The building that was estimated to be
useful for another 10 years was to be used as a factory site as a condition on the
grant. Legal fees incurred in relation to the donation was at P100,000 and was
charged to 2015 operating expenses. Another P200,000 was incurred to remodel and
renovate the building prior to use. The building was capitalized at P200,000
(renovation cost) and was depreciation over remaining life using straight line.
Required:
1. What is the correct net income in 2015?
2. What is the correct net income in 2016?
3. What is retroactive adjustment to the 2017 beginning retained earnings?
4. What is the net effect of the errors to the 2016 working capital?
5. What is the correct carrying value of the building as of December 31, 2016?
Problem 1-3 Effect Errors on Net Income
The income statement of Jerusalem Company for the years ended December 2014,
2015, and 2016 indicate the following net income:
2014
170,000
2015
205,000
2016
186,000
An examination of the accounting records for these years indicates that several errors
were made in arriving at the net income amounts reported. The following errors were
discovered:
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a. Sale of merchandise on account amounting to P 15,000 was not recorded at the end
of 2015.
b. Goods costing P 8,000 were in transit from a supplier on December 31, 2014. The
goods were appropriately included in the ending inventory but the corresponding
purchase was not recorded.
c. Accrued salaries were consistently omitted from the records. The amounts omitted
were:
2014 P10,000
2015 P14,000
2016 P16,000
d. The merchandise inventory at December 31, 2015 was understated by P 9,000 as
the result of errors made in the footings and extensions on the inventory sheets.
e. Unexpired insurance of P 12,000 applicable to 2015 was expensed in 2014.
f. Interest receivable of P2,400 was not recorded on December 31, 2015.
g. On January 2, 2015, a piece of equipment costing P40,000 was sold for P18,000. At
the date of sale, the equipment had an accumulated depreciation of P24,000. The
cash received was recorded as income in 2015. In addition, depreciation was
recorded for this equipment in both 2015 and 2016 at the rate of 10% of cost.
12/31/2016
P780,000
213,000
307,800
12/31/2015
P873,600
259,200
384,000
561,000
470,400
522,000
564,000
Required:Based on the above data and the result of your audit, provide the following:
1. What is the total effect of the errors on the 2015 net income?
2. What is the total effect of the errors on the 2016 net income?
3. What is the total effect of the errors on the balance of the companys retained
earnings at December 31, 2016?
4. What is the total effect of the errors on the companys working capital at December
31, 2016?
5. The necessary adjusting journal entry for the error in recording capital expenditures
on Machinery as of December 31, 2015.
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