ASSIGNMENT: Correction of Errors

Intermediate Accounting 1

Reference: Intermediate Accounting, Part 3; Millan

Intermediate Accounting, Part 3; Valix

Write your answers in your Journal of Learnings (JoL).

Javier Co. made the following errors:

a. December 31, 20x1 inventory was understated by P20,000.

b. December 31, 20x2 inventory was overstated by P45,000.
c. Purchases on account in 20x1 were understated by P90,000 (not included in the physical
count).
d. Advances to suppliers in 20x2 totaling P125,000 were inappropriately charges as purchases.
e. December 31, 20x1 prepaid insurance was overstated by P5,000.
f. December 31, 20x1 unearned rent income was overstated by P25,000.
g. December 31, 20x2 interest receivable was understated by P18,000.
h. December 31, 20x2 accrued salaries payable was understated by P25,000.
i. Advances from customers in 20x2 totaling P50,000 were inappropriately recognized as sales
but the goods were delivered in 20x3.
j. Depreciation expense in 20x1 was overstated by P7,500.
k. In 20x2, the acquisition cost of a delivery truck amounting to P100,000 was inappropriately
charged as expense. The delivery truck has a useful life of five years. Javier’s policy is to
provide a full year’s straight-line depreciation in the year of acquisition and none in the year of
disposal.
l. A fully depreciated equipment with no residual value was sold in 20x3 for P60,000 but the sale
was recorded in the following year.

Profits before correction of errors were P125,000, P165,000, and P220,000 in 20x1, 20x2, and 20x3,
respectively.

Retained earnings before correction of errors were P1,125,000, P1280,000 and P1,500,000 in 20x1,
20x2, and 20x3, respectively.

Requirements: Ignoring income taxes, compute the following:

1. The net effect of the errors on the following:

a. 20x1, 20x2, and 20x3 profit.
b. 20x1, 20x2, and 20x3 year-end retained earnings
c. 20x1, 20x2, and 20x3 year-end working capital.
2. The corrected profits for the years 20x1, 20x2, and 20x3.
3. The corrected retained earnings for years 20x1, 20x2, and 20x3.
4. Provide all necessary correcting entries assuming the errors were discovered in 20x3
while the books in 20x3 are still open.
5. Provide all necessary correcting entries assuming the errors were discovered in early
in 20x4 after the books in 20x3 are already closed.