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Auditing Problem

1. The Always Change Diaper Service Company of 2017, management decided to change to the FIFO
decided to change from the straight-line to the method. The company has a tax rate of 30%. The
double-declining-balance (DDB) depreciation following information has been developed.
method. The asset was purchased on January 1, 2016 2017
2015, for P 40,000 and had an estimated useful Weighted Ave. Ending Inventory 500,000
life of five years and no residual value. The 520,000
company decided to change the method of FIFO Ending Inventory 550,000
depreciation at the beginning of 2017. The 590,000
companys net income for 2017 would have been Revenues 1,500,000
P 100,000 if the straight-line method of 1,750,000
depreciation was used. What is the amount of Income Before Income Taxes
depreciation expense recognized in 2017? (computed under the WA method) 600,000
a. 5,760 c. 9,600 650,000
b. 8,000 d. 16,000
4. In the 2017 comparative income statement, how
2. The Dallas Company discovered the following much must be presented as the 2016 restated
errors affecting its financial statements issued on net income after tax?
December 31, 2016: a. 385,000 c. 455,000
(1) depreciation expense of P 4,000 was b. 420,000 d. 635,000
understated for
2016 5. In the 2017 comparative income statement, how
(2) merchandise costing P 8,000 was in transit much must be presented as the 2017 net income
(FOB shipping point) at December 31, 2016; after tax?
the purchase was not recorded and the a. 420,000 c. 469,000
inventory was not included in the physical b. 441,000 d. 504,000
inventory amount
(3) prepaid expenses of P 1,000 were omitted at 6. What is the adjusted retained earnings in 2017?
December 31, 2016, and the cash payment a. 889,000 c. 924,000
during the period was recorded as an b. 896,000 d. 959,000
expense; and
(4) the company failed to accrue P 2,000 interest 7. Spirit, Inc. acquired equipment on January 1,
expense on December 31, 2016. 2011, for P100,000. Spirit estimates that the
Assuming that no correcting entries were made, equipment will have a useful life of 20 years and
income before income taxes for 2016 was: a P10,000 residual value. Spirit uses straight-line
a. 1,000 overstated. depreciation. On January 1, 2016, Spirit
b. 4,000 overstated. determines that the equipment will only be
c. 3,000 understated. useful for ten more years and the salvage value
d. 5,000 overstated. is estimated to be zero. What is the depreciation
expense for 2016?
3. In 2015, Jones Company failed to include the a. 3,375 c. 6,750
depreciation expense for equipment acquired b. 3,875 d. 7,750
during the last quarter of the fiscal year. Jones
discovered the error in 2017 just For the next two (2) questions:
after publication of its 2016 financial statements. The Al Right Company made the following errors
This error is: that were discovered by the auditors in connection
a. a counterbalancing error that corrected with preparation of the December 31, 2017, income
itself at the end of 2016. statement. It reported net income of P 70,000 for
b. a noncounterbalancing error that will 2011 and P 100,000 for 2017. Ignore income taxes.
never be corrected and therefore requires (1) On January 1, 2016, the company recorded
a correcting journal entry in 2017. the P 30,000 acquisition cost of equipment
c. a noncounterbalancing error that will be with a ten-year life as maintenance expense.
corrected when the asset is sold or at the Straight-line depreciation is usually used and
end of its useful life and therefore no residual value is expected at the end of
requires a correcting journal entry in the useful life.
2017. (2) On January 1, 2016, Al Right Company
d. a counterbalancing error that requires a collected P10,000 for two years rental
correcting journal entry in 2017. income in advance and failed to set up an
unearned revenue account at year-end. It
For the next three (3) questions: credited all the rent to Rent Revenue when
The Eagle Company began operations on January 1, received.
2016, and used the Weighted Average method in
costing its raw material inventory. At the beginning
(3) A three-year insurance policy costing and P 2,800,000, respectively. Its retained
P12,000 was charged to expense when paid earnings balances at the beginning of 2016 and
in advance on January 1, 2016. 2017 (unadjusted) were P 1,400,000 and P
(4) Ending inventory was overstated by P7,000 2,100,000, respectively. The company paid no
on December 31, 2016, and understated by dividends in any year.
P3,000 on December 31, 2017, due to 10. In the 2017 comparative income statement, how
computational errors. much must be presented as the 2016 restated
(5) Accrued wages expense was omitted in the net income after tax?
amount of P7,000 on December 31, 2016, a. 560,000 c. 735,000
and P8,000 on December 31, 2017. b. 665,000 d. 840,000
8. What is the correct net income for 2016?
a. 56,000 c. 86,000 11. In the 2017 comparative income statement, how
b. 80,000 d. 116,000 much must be presented as the 2017 net income
after tax?
9. What is the correct net income for 2017? a. 735,000 c. 805,000
a. 83,000 c. 103,000 b. 770,000 d. 840,000
b. 87,000 d. 107,000
12. What is the adjusted retained earnings in 2016?
At the beginning of 2017, Tiger Company decided to a. 2,135,000 c. 2,240,000
change from the average cost inventory cost flow b. 2,170,000 d. 2,345,000
assumption to the FIFO cost flow assumption for
financial reporting purposes. The following data are 13. What is the adjusted retained earnings in 2017?
available in regard to Tiger Companys pretax a. 2,870,000 c. 3,010,000
operating income and cost of goods sold. b. 2,975,000 d. 3,045,000

Year Reported Income Difference Bet. 14. Which of the following is not a possible method
Adj. Income of disclosing an accounting change or error?
Before Income Ave. Cost of Goods a. Retrospective application
Before Income b. Cumulative effect adjustment
Taxes Sold and FIFO Cost of
c. Prospective application
Goods Sold d. Prior-period adjustment
To 2016 2,000,000 150,000 15. First Statement: The initial adoption by a
2,150,000 company of an accounting principle for an event
2016 1,000,000 50,000 or transaction occurring for the first time is not
1,050,000 considered a change in accounting principle.
2017 1,100,000 Second Statement: A change in reporting
The income tax rate is 30%. The company has a entity requires prospective treatment in the
simple capital structure with 100,000 shares of financial statements
common stock outstanding. The company a. Only first statement is correct.
computed its 2017 income before taxes using b. Only second statement is correct.
the newly adopted inventory cost flow method. c. Both statements are correct.
Tiger Companys 2016 and 2017 revenues were d. Neither statements are correct.
P 2,500,000