Chapter 2

Correction of Errors

Problem 1
Under(Over) statement in Profit of Retained
Nature of error Earnings 2012 Accounts Affected
01/01/12
2010 2011 2012 Account Dr. Cr.
Omission of prepaid
expenses
12/31/10 29,000 (29,000)
12/31/11 30,000 (30,000) 30,000 Expenses 30,000
12/31/12 34,000 Prepaid expenses 34,000
Expenses 34,000
Omission of unearned
revenue:
12/31/10 (20,000) 20,000
12/31/11 (28,000) 28,000 (28,000) Revenue 28,000
12/31/12 (15,000) Revenue 15,000
Unearned revenue 15,000
Omission of accrued
expenses:
12/31/10 (27,500) 27,500
12/31/11 (25,000) 25,000 (25,000) Expenses 25,000
12/31/12 (27,000) Expenses 27,000
Accrued expenses 27,000
Omission of accrued
revenues
12/31/10 42,500 (42,500)
12/31/11 45,000 (45,000) 45,000 Revenues 45,000
12/31/12 41,000 Accrued revenues 41,000
Revenues 41,000
Net
under(over)statement 24,000 ( 2,000) 11,000 22,000
Reported profit(loss) 300,000 (540,000) 250,000
Corrected profit(loss) 324,000 (542,000) 251,000

Problem 2

1. A 2. A 3. D 4. D 5. C

Problem 3

1. Retained Earnings 160,000

Wages Expense 160,000

2. Interest Income 48,000

Retained Earnings 48,000

3. Insurance Expense 18,000

Prepaid Insurance 18,000
Retained Earnings 36,000

4. Supplies Expense 25,000

Retained Earnings 25,000

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Correction of Errors
5. Retained Earnings 80,000
Accumulated Amortization Development Cost 80,000
Capitalized Development Cost 120,000
Amortization Expense Development Cost 40,000

6. Retained Earnings 80,000

Service Revenue 40,000
Unearned Service Revenue 40,000

7. Retained Earnings 36,000

Rent Revenue 36,000

8. Office Equipment 1,500,000

Depreciation Expense - Equipment 300,000
Accumulated Depreciation 900,000
Retained Earnings 900,000

Problem 4

(Function of Expense Method)

1. No entry, counterbalanced as of 12/31/11

2. Retained Earnings
Cost of Sales

3. Retained Earnings
Cost of Sales

4. No entry ( no effect on cost of sales and profit of both 2011 and 2012; as both beginning inventory and purchases
in 2012 had been transferred to cost of sales)

5. Cost of Sales
Retained Earnings

6. Sales
Retained Earnings

(Nature of Expense Method)

1. No entry, counterbalanced as of 12/31/11

2. Retained Earnings
Inventory, beginning

3. Retained Earnings
Purchases

4. Inventory, beginning
Purchases

5. Inventory, beginning
Retained Earnings

6. Sales
Retained Earnings

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Correction of Errors
Problem 5 (Dragon Ball Company)

(1) Schedule to compute correct profit:

Under(over)statement in Profit
2010 2011 2012 RE, 1/1/12
Omission of accrued wages
12/31/10 (80,000) 80,000
12/31/11 (60,000) 60,000 (60,000)
12/31/12 (78,000)
Omission of unused supplies
12/31/10 32,000 (32,000)
12/31/11 25,000 (25,000) 25,000
12/31/12 22,400
Omission of accrued interest income
12/31/10 18,000 (18,000)
Sale of equipment - Proceeds (25,000)
Gain on sale 7,000
Recorded depreciation 4,200 4,200 4,200 (9,600)
Omission of unearned rent (40,000)
Net under(over)statement (43,800) (800) (56,400) (44,600)
Reported Profit 450,000 290,000 440,000
Corrected Profit 406,200 289,200 383,600

(2) Audit adjusting entries:

Retained Earnings 60,000

Wages Expense 60,000

Wages Expense 78,000

Wages Payable 78,000

Supplies Expense 25,000

Retained Earnings 25,000

Unused Supplies 22,400

Supplies Expense 22,400

Retained Earnings 9,600

Accumulated Depreciation 36,600
Equipment 42,000
Depreciation Expense 4,200

(3) Correcting entries in 2013

Retained Earnings 78,000

Wages Expense 78,000

Supplies Expense 22,400

Retained Earnings 22,400

Retained Earnings 5,400

Accumulated Depreciation 36,600
Equipment 42,000

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Correction of Errors
Problem 6 (Erasure Company)

1. Accumulated Depreciation 16,500

Depreciation Expense 5,500
Retained Earnings 11,000

2. No entry (counterbalanced)

3. Loss on Damages 585,000

Retained Earnings 585,000

4. Goodwill 12,000
Retained Earnings 12,000
(Note: Goodwill is not subject to amortization)

5. Retained Earnings 328,500

Sales 328,500

6. Retained Earnings 18,000

Accumulated Depreciation 2,000
Equipment 20.000

Repairs and Maintenance 30,000

Equipment 30,000

Accumulated Depreciation (10% x (20,000+ 30,000) 5,000

Depreciation Expense 5,000

7. Cost of Sales 21,000

Retained Earnings 21,000

Cost of Sales 20,000

Inventory 20,000

8. No entry ( no effect on cost of sales of 2011 and 2012; Cost of sales had been set up; both purchases and
beginning inventory for 2012 had been transferred to cost of sales)

Problem 7 (Gloria Company)

Audit adjustments to correct 2011 financial statements Audit adjustments to correct 2012 financial statements

Other operating income 8,000 Retained earnings 8,000

Unearned commission income 8,000 Other operating income 8,000

Other operating income 6,400

Unearned commission income 6,400

Prepaid rent 16,000 Selling and administrative expenses 16,000

Selling and administrative expenses 16,000 Retained earnings 16,000

Prepaid rent 21,000

Selling and administrative expenses 21,000

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Correction of Errors
Interest receivable 8,000 Other operating income 8,000
Other operating income 8,000 Retained earnings 8,000

Interest receivable 12,000

Interest income 12,000

Sales 90,000
Advances from customers 90,000

Cost of sales 15,000 Retained earnings 15,000

Accounts payable 15,000 Cost of sales 15,000

Equipment 20,000 Equipment 20,000

Selling and administrative expenses 20,000 Retained earnings 18,000
Accumulated depreciation 2,000

Selling and administrative expenses 2,000 Selling and administrative expenses 4,000
Accumulated depreciation 2,000 Accumulated depreciation 4,000

(a)
Gloria Company
Comparative Statements of Comprehensive Income
For the Years Ended December 31, 2012 and 2011

2012 2011
Sales P 910,000 P 720,000
Cost of Sales 585,000 465,000
Gross Profit P 325,000 P 255,000
Other Operating Income 73,600 30,000
Total Income P 398,600 P 285,000
Less: Selling and Administrative Expenses 279,000 156,000
Net Income from Operations P 119,600 P 129,000
Interest Expense 80,000 20,000
Net Income P 39,600 P 109,000

(b) Effect on total assets, December 31, 2011 (see audit adjusting entries for 2011)
= 16,000 + 8,000 + 20,000 2,000 = P42,000 understated

(c) Effect on total assets, December 31, 2012 (see audit adjusting entries for 2012)
= 21,000 + 12,000 + 20,000 2,000 4,000 = P47,000 understated.

(d) Effect on total liabilities, December 31, 2012 (see audit adjusting entries for 2012)
= 6,400 + 90,000 = 96,400 understated

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Chapter 2
Correction of Errors
Problem 8 Golden Crest

Particulars 2011 Profit Retained earnings, Non- current Retained earnings

Dec. 31, 2011 Assets, 12/31/12 January 1, 2011
Omission of unused supplies
12/31/11 15,000 15,000
12/31/12
Repairs charged to equipment on 1/1/10 (8,500) (68,000) (59,500) (76,500)
AFS securities were measured at cost 50,000
Correct cost of equipment, P746,070
Recorded cost 900,000
Difference 153,930 (153,930)
Difference in depreciation
2011 153,930/10 x 3/12 = 3,848 3,848 3,848 3,848
2012 153,930 / 10 =15,393 15,393
Interest expense
2011 P255,393 x 3/12 = (63,848) (63,848)
Net under (overstatement) (53,500) (113,000) (144,182) (76,500)

Present value of the note on October 1, 2011 = 300,000 x 2.4869 = 746,070

Amortization table for the note payable
Date Periodic Payment Applied to Interest Applied to Principal Bal. of Principal
October 1, 2011 746,070
September 30, 2012 300,000 74,607 225,393 520,677
September 30, 2013 300,000 52,068 247,932 272,745

Problem 9 (Golden Harvest Corporation)

(a) Computation of correct profit (loss)
Particulars 2011 2012 2013
Omissions of
Accrued expenses, 12/31/11 (20,000) 20,000
12/31/12 (25,000) 25,000
12/31/13 (30,000)
Accrued income 12/31/11 32,000 (32,000)
12/31/12 30,000 (30,000)
12/31/13 26,000
Prepaid expenses 12/31/11 12,000 (12,000)
12/31/12 18,000 (18,000)
12/31/13 24,000
Unearned income 12/31/11 (15,000) 15,000
12/31/12 (10,000) 10,000
12/31/13 (8,000)
Omission in the ending inventory
2012 28,000 (28,000)
2013 64,000
Machine charged to expense on August 31, 2011 80,000
Depreciation on the machine (3,333) (10,000) (10,000)
Net understatement (overstatement) 85,667 22,000 25,000
Reported profit (loss) (250,000) 320,000 380,000
Correct profit (loss) 164,333 342,000 405,000

Computation of retained earnings

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Correction of Errors
2011 2012 2013
Balance, January 1 P 0 P(164,333) P117,667
Profit (loss) (164,333) 342,000 405,000
Dividends declared (60,000) (100,000)
Balance, December 31 P(164,333) P117,667 422,667

(b) 2013 Audit Adjusting Entries

Retained Earnings 25,000

Operating Expenses 25,000

Operating Expenses 30,000

Accrued Expenses 30,000

Income 30,000
Retained Earnings 30,000

Accrued Income 26,000

Income 26,000

Expenses 18,000
Retained Earnings 18,000

Prepaid Expenses 24,000

Expenses 24,000

Retained Earnings 10,000

Income 10,000

Income 8,000
Unearned Income 8,000

Inventory, beginning/Cost of Sales 28,000

Retained Earnings 28,000

Inventory, end 64,000

Income Summary/ Cost of Sales 64,000

Machinery 80,000
Operating Expenses 10,000
Retained Earnings 66,667
Accumulated Depreciation 23,333

Problem 10 (Sukiyaki Corporation)

2011 Audit Adjustments to restate 2011 FS Audit Adjustments to Restate 2012 FS

Allowance for Doubtful Accounts 5,000
Operating Expenses 5,000
32,000 37,000 = 5,000

Other Operating Expenses Unrealized Held for Trading Equity Securities 7,000
Loss on Trading Sec. 3,000 Retained Earnings 3,000
Held for Trading Equity Securities 3,000 Other Operating Income
Unrealized Gain on Trading Sec. 10,000

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Correction of Errors

Cost of Sales 8,900 Retained Earnings 8,900

Merchandise Inventory 8,900 Cost of Sales 8,900

Cost of Sales 13,600

Merchandise Inventory 13,600

Equipment 36,000 Equipment 36,000

Operating Expenses 36,000 Retained Earnings 36,000

Operating Expenses 3,000 Retained Earnings 3,000

Accumulated Depreciation 3,000 Operating Expenses 3,000
(36,000 -6,000)/10 Accumulated Depreciation 6,000

Accumulated Depreciation 20,000

Equipment 17,000
Other Operating Income
Gain on Sale of Equipment 3,000

Prepaid Insurance 6,000 Prepaid Insurance 3,000

Operating Expenses 3,000 Operating Expenses 3,000
Retained Earnings 9,000 Retained Earnings 6,000

Sukiyaki Corporation
Statement of Comprehensive Income
For the Years Ended December 31, 2012 and 2011

2012 2011
Sales P1,000,000 P900,000
Cost of Sales 434,700 403,900
Gross Profit P 565,300 P 496,100
Gain on Sale of Equipment 3,000
Unrealized Gain on Trading Securities 10,000 ________
Total Income 578,300 496,100
Operating Expenses (351,000) (280,000)
Unrealized Loss on Trading Securities (3,000)
Profit P227,300 P 213,100

Sukiyaki Corporation
Statement of Financial Position
December 31, 2012 and 211

2012 2011

Current Assets
Cash P183,000 P 2,000
Held for Trading Equity Securities 85,000 75,000
Accounts Receivable, net 360,000 278,000
Merchandise Inventory 193,400 193,100
Prepaid Expenses 3,000 6,000
Total Current Assets P 824,400 P554,100
Non-Current Assets
Property, Plant and Equipment, net of Acc. Deprn P 78,400 P 96,100
Total Assets P902,800 P650,200

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Correction of Errors
Current Liabilities
Accounts Payable P121,400 P196,100

Shareholders Equity
Ordinary Share P260,000 P180,000
Share Premium 20,000 0
Retained Earnings 501,400 274,100
Total Shareholders Equity P781,400 P 454,100
Total Liabilities and Shareholders Equity P902,800 P650,200

Cash Flow Statement

For the Year Ended December 31, 2012

Cash Flow From Operating Activities

Collection from customers P904,000
Payment to Suppliers (509,700)
Payment for expenses (315,800)
Net cash flow from operations P78,500
Cash Flow From Investing Activities
Sale of equipment P 3,000
Purchase of equipment ( 500)
Net cash flow from investing activities 2,500
Cash Flow From Financing Activities
Issue of ordinary share (80,000 + 20,000) 100,000
Increase in cash P181,000
Cash Balance, January 1, 2007 2,000
Cash Balance, December 31 P183,000

Computations: 2012 2011

Accounts Receivable P392,000 P296,000
Allowance for Uncollectible Accounts 32,000 18,000
AR, Net P360,000 P278,000

Property, Plant and Equipment

Cost P186,000 P205,500
Accumulated Depreciation 107,600 109,400
Carrying value P 78,400 P 96,100

Accounts Receivable, beg. P296,000

Sales 1,000,000
Accounts Receivable, end (392,000)
Collections from customers P904,000

Inventory, end P193,400

Cost of sales 434,700
Inventory, beg. (193,400)
Purchases P434,700
Accounts Payable, beginning 196,100
Accounts Payable, end (121,400)
Payment to suppliers P509,700

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Correction of Errors
Accumulated depreciation, end P107,600
Accumulated depreciation of equipment sold 20,000
Accumulated depreciation, beg. (109,400)
Depreciation expense P18,200

Operating expenses P351,000

Depreciation ( 18,200)
Doubtful accounts expense 32,000 18,000 ( 14,000)
Decrease in prepaid expenses ( 3,000)
Operating expenses paid P315,800

Property, Plant and Equipment, cost, end P186,000

Cost of equipment sold 20,000
Property, plant and equipment, cost, beg. (205,500)
Equipment purchased P 500

Problem 11 (Tahoma Corporation)

Adjusting Entries December 31, 2012

Sales 100,000
Retained Earnings 100,000

Accounts Receivable 250,000

Sales 250,000

Retained Earnings 175,000

Purchases 175,000

Purchases 140,000
Accounts Payable 140,000

Sales 20,000
Unearned Revenue 20,000

Retained Earnings 35,000

Expenses 35,000

Expenses 50,000
Accrued Expenses 50,000

Inventory, beginning 75,000

Retained Earnings 75,000

Inventory, end 110,000

Income Summary 110,000

Advances to Suppliers 50,000

Purchases 50,000

Retained Earnings 3,333

Expenses 10,000
Accumulated Depreciation Printing Equipment 13,333

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Expenses 37,500
Retained Earnings 12,500
Accumulated Depreciation Building 50,000

Expenses 25,000
Allowance for Uncollectible Accounts 25,000

Interest Expense (500,000 x 12% x 8/12) 40,000

Retained Earnings (500,000 x 12% x 4/12) 20,000
Operating Expenses 60,000
(Note: 2 semi-annual payments were made in 2012; both were charged to operating expenses, balance of Mortgage
payable before the annual payment in August 2012 is 450,000 + 50,000)

Interest Expense 18,000

Interest Payable 18,000
450,000 x 12% x 4/12

Tahoma Company
Statement of Comprehensive Income
For the Year Ended December 31, 2012

Sales P 2,180,000
Cost of Sales
Inventory, January 1 75,000
Purchases 915,000
Inventory, Dec. 31 (110,000)
Cost of Sales 880,000
Gross Profit 1,250,000
Selling and Administrative Expenses 777,500
Profit before interest expense 472,500
Interest expense 58,000
Profit 414,500

Tahoma Company
Statement of Financial Position
December 31, 2012

Assets
Current Assets
Cash P 750,000
Accounts receivable, net of allowance for uncollectible accounts of P25,000
225,000
Advances to suppliers 50,000
Inventory 110,000
Total current assets P1,135,000
Non-current assets
Land P 400,000
Building, net of P50,000 accumulated depreciation 700,000
Printing equipment, net of P13,333 accumulated depreciation 86,667
Total property, plant and equipment P1,186,667
Total assets P2,321,667

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Correction of Errors
Liabilities and Shareholders Equity
Current Liabilities
Accounts payable P 140,000
Accrued expenses 50,000
Current portion of mortgage payable 50,000
Interest payable 18,000
Unearned revenue 20,000
Total current liabilities P278,000

Non-current liabilities
Mortgage payable, net of current portion P 400,000
Total liabilities P 678,000

Shareholders Equity
Ordinary share capital P 1,000,000
Retained earnings *643,667
Total shareholders equity P 1,643,667
Total liabilities and shareholders equity P2,321,667

*Retained earnings, January 1, 2012 before adjustment P 300,000

Correction of prior period errors ( 70,833)
Profit for 2012 414,500
Retained earnings, December 31, 2012 P 643,667

Multiple Choice

1. A 700,000 + 29,000 33,000 15,000 22,000+ 18,000

2. C -33,000 15,000 15,000 + 18,000 = ( 45,000 )
3. A - 29,000 15,000 + 22,000 = (22,000)
4. A 5,000,000 + 200,000 250,000 300,000 + 100,000 = 4,750,000
5. B (300,000) + (50,000) + 100,000 = (250,000)
6. A - 16,000 15,000 10,000 + 10,800 = (30,200)
7. A - 15,000 + 10,800 = (4,200)
8. B 5,000,000 200,000 150,000 = 4,650,000
9. B 2,500,000 1,000,000 + 1,500,000 500,000 200,000 + 600,000 = 2,900,000
10. D 1,500,000 + 600,000 = 2,100,000
11. B 1,000,000 + 500,000 + 200,000 = 1,700,000
12. B 200,000 / 5
13.. C 155,000 + 1,000 8,000 + 12,000 5,500 10,000 = 144,500
14. B 3,000,000 400,000 = 2,600,000
15. A Profit is understated by 7,000 + 3,000; RE is understated by P3,000; P7,000 has been
counterbalanced.
16. D 50,400 / 9 = 5,600
17. C 54,000 11,200 = 42,800
18. C
19 A 400,000 + 300,000 + 500,000 350,000 = 850,000 net overstatement
20. -300,000 500,000 + 200,000 = 600,000 overstated

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