Correction of errors

Bright Inc. is a manufacturer of high-tech industrial parts that was started in 2016 by two talented
engineers with little business training. As part of an internal audit, the following facts were discovered.
The audit occurred during 2018 before any adjusting entries or closing entries were prepared.

a. A five-year casualty insurance policy was purchased at the beginning of 2016 for P 35,000. The
full amount was debited to insurance expense at the time.
b. On December 31, 2017, merchandise inventory was overstated by P25,000 due to a mistake in
the physical inventory count using the periodic inventory system
c. At the end of 2017, the company failed to accrue P 15,500 of sales commissions earned by
employees during 2017. The expense was recorded when the commissions were paid in early
2018.
d. Bad debts expense is determined each year as 1% of credit sales. Actual collection experience of
recent years indicates that 0.75% is a better indication of uncollectible accounts. Management
effects the change in 2018. Credit sales for 2018 are P 4,000,000; in 2017 they were P 3,700,000.
e. Additional industrial robots were acquired at the beginning of 2016 and added to the company’s
assembly process. The P 100,000 cost of the equipment was inadvertently recorded as repair
expense. Robots have 10-year useful lives and no material salvage value. This class of equipment
is depreciated by the straight-line method.

Questions: Based on the above information, answer the following:

1. The entry to correct the error described in item a should include a

a. Credit to prepaid insurance P 21,000
b. Credit to retained earnings P 21,000
c. Debit to insurance expense P 14,000
d. Credit to insurance expense P 7,000
2. The entry to correct the error described in item b should include a
a. Debit to inventory P 25,000
b. Debit to retained earnings P 25,000
c. Credit to purchases P 25,000
d. No adjusting entry is needed
3. The entry to correct the error described in item c should include a
a. Debit to retained earnings P15,500
b. Credit to retained earnings P 15,500
c. Debit to commission expense P 15,500
d. No adjusting entry is needed
4. The entry to correct the error described in item d should include a
a. Debit to bad expense P 30,000
b. Credit to allowance for uncollectible accounts P 30,000
c. Debit to retained eranings P 30,000
d. No adjusting entry is needed
5. After correcting all the errors described in items a to e, retained earnings should:
a. Decrease by P40,500
b. Increase by P 60,500
c. Increase by P 50,500
d. Increase by P 80,500

Cain discovered the following errors in connection with his examination of the financial
statements of the Abel Corp.:

1. Purchase of merchandise on account on December 25, 2017 amounting to P 60,000 was not
recorded until it was paid in January 2018. The merchandise was properly included in the
ending inventory in 2017.
2. Sale of merchandise on account on December 30, 2017 amounting to P 80,000 was not
recorded until it was collected in January 2018. The merchandise was properly excluded in
the ending inventory in 2017.
3. On December 31, 2017, the ending inventory was overstated by P 20,000.

The following data were extracted from the financial statements of Abel Corp:

2017 2018
Net income 200,000 160,000
Working Capital 180,000 260,000
RE, End 200,000 360,000

Questions: Based on the above data, determine the following:

1. Net income 2017

a. 120,000
b. 140,000
c. 200,000
d. 220,000
2. Working capital, 2017
a. 120,000
b. 180,000
c. 200,000
d. 240,000
3. RE, 2017
a. 120,000
b. 140,000
c. 200,000
d. 220,000
4. Net income, 2018
a. 160,000
 b. 140,000
c. 200,000
d. 220,000
5. Working capital, 2018
a. 180,000
b. 240,000
c. 260,000
d. 320,000
6. Retained earnings, 2018
a. 280,000
b. 360,000
c. 380,000
d. 420,000