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UNIT 1. ANALYSIS AND CORRECTION OF ERRORS - HANDOUT - Final - T31516 PDF
UNIT 1. ANALYSIS AND CORRECTION OF ERRORS - HANDOUT - Final - T31516 PDF
For each item, indicate the effects of each of the following errors by writing O for
overstatement, U for understatement, and X for no effect in the appropriate column.
2015 2016
NI Asset Liability RE, RE, NI Asset Liability RE, RE,
before after before after
closing closing closing closing
A
B
C
D
E
F
G
H
I
J
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:
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?
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:
Problem 1-4Effect Errors on Net Income, Retained Earnings and Working Capital
You are auditing the financial statement of Platon Company for the first time. You have
discovered that the merchandise inventory at the end of each year was understated by
P100,000 and P200,000 in 2015 and 2016 respectively.
In addition, in inspecting the record of the company, you discovered that some items had
been improperly recorded and that certain year-end adjustments had been overlooked in
2015 and 2016. These omission and other errors for each summarized as follows:
12/31/2016 12/31/2015
Accrued Salaries P780,000 P873,600
Accrued Interests Income 213,000 259,200
Prepaid Insurance 307,800 384,000
Advances from Customers
(Collections from customers had been recorded as sales
but should have been recognized as advances from
customers because goods were not shipped until the 561,000 470,400
following year)
Machinery (Capital expenditures had been recorded as
repairs but should have been charged to Machinery; the
depreciation rate is 10% per year, but depreciation in the
year of expenditure is to be recognized at 5%.) 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.