CORRECTION OF ERRORS ACCOUNTING CHANGES

PROBLEM A PROBLEM B
In the course of your first examination of the financial statements of HOPE Corp. In the past, FORTITUDE Company has depreciated its computer hardware using
for the fiscal year ended June 30, 2014 you ascertained that the company reported the the straight-line method. The computer hardware has a 10% salvage value and an
following net income: estimated useful life of 5 years. As a result of the rapid advancement in information
Fiscal year ended June 30, 2014 P720,000 technology, management of Fortitude has determined that it receives most of the
Fiscal year ended June 30, 2013 570,000 benefits from its computer facilities in the first few years of ownership. Hence, as of
Fiscal year ended June 30, 2012 900,000 January 1, 2014, Fortitude proposes changing to the sum-of-the-years’-digits method for
The following information were brought to your attention as a result of your depreciating its computer hardware. The following computer purchases were made by
evidence gathering procedure: Peru at the beginning of each year.
a. The following items were consistently omitted at the end of each fiscal year: 2013 P60,000
June 30,2014 June 30,2013 June 30,2012 2012 50,000
Unused supplies P14,000 P18,000 P22,000 2011 90,000
Accrued utilities 28,000 32,000 30,000
DETERMINE:
Accrued interest expense 2,000 6,000 10,000
1.Depreciation expense recorded by Peru in 2011, 2012, and 2013
b. A three-year insurance amounting to P90,000 was paid and charged to insurance
2.Amount of depreciation expense that should be recognized in 2014
expense on January 1, 2012.
3.Journal entry to be prepared on January 1, 2014 to adjust the accounts
c. The following sales in transit at each fiscal year-end were recorded as year-end
sales, but were all shipped FOB destination. Related inventories were excluded
PROBLEM C
from the fiscal year-end count since these were no longer on hand on the
On January 1, 2013, BLESSED Inc. purchased computer hardware for P600,000.
respective count dates:
On the date of acquisition, Blessed’s management estimated the computers would have
June 30,2014 June 30,2013 June 30,2012
an estimated useful life of 5 years and would have a residual value of P60,000. The
Sales in transit P84,000 P130,000 P90,000 company used the double-declining-balance method to depreciate the computer
GP based on cost 40% 30% 25% hardware.
d. On July 1, 2013 Hope Corp. entered into a 10 year warehouse lease agreement On January 2014, Blessed’s management realized that technological
with XYZ Inc. The warehouse having a useful life of 15 years had a fair value of advancements had made the computers virtually obsolete and that they would have to
P350,000. The annual lease payments of P50,000, payable every July 1, beginning be replaced. Management decided to change the estimated useful life of the computer
2013 was charged by the company to rent expense. The warehouse reverts back hardware to 2 years.
to XYZ Inc. after the expiration of the lease. The implicit lease rate known to both
parties was at 10% while Delta Corp.’s borrowing rate was at 12%. DETERMINE:
1.Depreciation expense on computer hardware to be recorded in 2014
DETERMINE:
1.Adjusted net income for the fiscal year ended June 30, 2012
2.Adjusted net income for the fiscal year ended June 30, 2013
3.Adjusted net income for the fiscal year ended June 30, 2014
“Come to me, all of you who work hard and who carry heavy burdens and I will
4.Retroactive adjustment to retained earnings beginning of fiscal year 2014.
refresh you. Take my yoke upon you and learn from me for I am gentle and
5.Carrying value of the leased warehouse on Delta Corp.’s books as of June
30,2014
humble of heart; and you will find rest. For my yoke is good and my burden is
light.” –Matthew 11:28-30