A. C.

B. D.

A. C.
B. D.

A B. C. D.
.

1) Ff
• ff

Use the following information for the next two (2) questions:
• c

Use the following information for the next four (4) questions:
Jindo Company reported profits of P4,000,000 and P8,000,000 in 2021 and 2022, respectively. In 2023, the following prior period
errors were discovered:
• The inventory on December 31, 2021 was understated by P200,000.
• An equipment with an acquisition cost of P1,200,000 was erroneously charged as expense in 2021. The equipment has an
estimated useful life of 5 years with no residual value. Jindo Company provides full year depreciation in the year of acquisition.

The unadjusted balances of retained earnings are P8,800,000 and P16,800,000 as of December 31, 2021 and 2022, respectively.

1) How much is the correct profit in 2021?

A 7,560,000 B. 5,610,000 C. 5,160,000 D. 4,760,000
.

2) How much is the correct profit in 2022?

A 7,560,000 B. 5,720,000 C. 5,610,000 D. 5,160,000
.

3) How much is the correct retained earnings in 2021?

A 18,420,000 B. 17,520,000 C. 9,960,000 D. 9,860,000
.

4) How much is the correct retained earnings in 2022?

A 18,420,000 B. 17,520,000 C. 9,960,000 D. 9,860,000
.

Use the following information for the next four (4) questions:
Lakeland Company reported profits of P1,600,000 and P2,400,000 in 2021 and 2022, respectively. In 2023, the following prior
period errors were discovered:
• Prepaid supplies in 2021 were overstated by P80,000.
• Accrued salaries payable in 2021 were understated by P160,000.
• Repairs and maintenance expenses in 2021 amounting to P400,000 were erroneously capitalized and being depreciated over a
period of 4 years.

The unadjusted balances of retained earnings are P6,400,000 and P8,800,000 as of December 31, 2021 and 2022, respectively.

5) How much is the correct profit in 2021?

A 1,720,000 B. 1,610,000 C. 1,060,000 D. 1,006,000
.

6) How much is the correct profit in 2022?

A 2,740,000 B. 2,704,000 C. 2,610,000 D. 2,160,000
.

7) How much is the correct retained earnings in 2021?

A 5,860,000 B. 5,806,000 C. 5,520,000 D. 5,420,000
.

8) How much is the correct retained earnings in 2022?

A 8,960,000 B. 8,860,000 C. 8,600,000 D. 8,420,000

• J.S. CAYETANO ♣• • FAR EASTERN UNIVERSITY • • FINANCIAL ACCOUNTING II • • PAGE 1 OF 15•

 .

1) The following information relates to the Patricia Company:

•
2024 cash dividends declared 400,000
Unadjusted (reported) retained earnings, January 1, 2024 ?
2024 net income 480,000
Error in 2023, understatement of ending inventory, error found in 2024 150,000
Unadjusted (reported) retained earnings, December 31, 2024 1,400,000

What is the restated January 1, 2024, balance of retained earnings?

A 1,170,000 B. 1,320,000 C. 1,470,000 D. 1,630,000
.

1) Jags Company has recorded bad debts expense in the past at a rate of 1.5% of net sales. In 2023, Jags decides to increase its
estimate to 2%. If the new rate had been used in prior years, cumulative bad debt expense would have been P380,000 instead of
P285,000. In 2023, bad debt expense will be P120,000 instead of P90,000. If Jags tax rate is 35%, what amount should be
adjusted to the beginning balance of the retained earnings in 2023?
A None B. 64,600 C. 95,000 D. 120,000
.

ANSWER: A
No adjustment is made on the beginning balance of retained earnings for changes involving estimates. For 2023, the company will
report a bad debt expense of P120,000.

1) The draft financial statement of Ariana Grande Corporation for the year ended December 31, 2022 have been prepared. A final
review of the draft reveals an overvaluation of the closing inventory of P200,000 at December 31, 2021. Further investigation
shows that there was an overvaluation at December 31, 2020 of P120,000

According to PAS 8 Accounting policies, changes in accounting estimate and errors, what adjustment should be made to the
profit for the year ended December 31, 2021 presented as the comparative figure in the 2022 financial statements?
A 120,000 decrease B. No change C. 80,000 decrease D. 200,000 decrease
.

1) At December 31, 2014, Samantha Corporation reported current assets of P3,700,000 and current liabilities of P2,000,000. The
following items may have been recorded incorrectly:
• Goods purchased costing P220,000 were shipped FOB shipping point by supplier on December 31, 2014. Samantha
received and recorded the invoice on December 29, but the goods were no included in Samantha’s physical count of
inventory because they were not received until January 4, 2015.
• Goods purchased costing P150,000 were shipped FOB destination by a supplier on December 26, 2014. Samantha received
and recorded the invoice on December 31, but the goods were not included in Samantha’s physical count of inventory
because they were not received until January 3, 2015.
• Goods held on consignment from Dog Company were included in Samantha’s physical count of inventory at P130,000.
• Freight in of P30,000 was debited to advertising expense on December 28. This freight relates to goods still unsold at
December 31.

On December 31, 2014, Samantha should report on its statement of financial position current asset and current liabilities,
respectively, of
Current Assets Current Liabilities Current Assets Current Liabilities
A. 3,820,000 1,850,000 C. 3,790,000 1,880,000
B. 3,820,000 1,720,000 D. 3,670,000 1,880,000

Use the following information for the next five (5) questions:
Ochotorena Company made the following errors:
• December 31, 2015 inventory was understated by P25,000.
• December 31, 2016 inventory was overstated by P40,000.
• Purchase on account in 2015 were understated by P100,000.
• Advances to suppliers in 2016 totaling P130,000 were inappropriately charged as purchases.
• December 31, 2015 prepaid insurance was overstated by P5,000.
• December 31, 2015 unearned rent income was overstated by P26,000.

• PAGE 2 OF 15•
• December 31, 2016 interest receivable was understated by P17,000.
• December 31, 2016 accrued salaries payable was understated by P30,000.
• Advances from customers in 2016 totaling P60,000 were inappropriately recognized as sales but the goods were delivered in
2017.
• Depreciation expense in 2015 was overstated by P7,200.
• In 2016, the acquisition cost of a delivery truck amounting to P90,000 was inappropriately charged as expense. The delivery
truck has a useful life of five years. Ochotorena’s policy is to provide a full year’s straight line depreciation in the year of
acquisition and none in the year of disposal.
• A fully depreciated equipment with no residual value was sold in 2017 for P50,000 but the sale was recorded in the following
year.
• Profits before correction of errors were P123,000, P156,000, and P210,000 in 2015, 2016, and 2017 respectively. Retained
earnings before correction of errors were P1,123,000, P1,279,000 and P1,489,000 in 2015, 2016, and 2017, respectively.

1) What is the net (overstatement)/understatement of the errors on the 2015 profit?

A (46,800) B. (64,800) C. 153,200 D. 3,200
.

2) What is the corrected retained earnings for the year 2016?

A 1,575,200 B. 1,375,200 C. 1,425,200 D. 1,303,200
.

3) What is the corrected profit for the year 2017?

A 315,000 B. 193,000 C. 243,000 D. 225,000
.

4) What is the corrected retained earnings for the year 2017?

A 1,600,200 B. 1,568,200 C. 1,650,200 D. 1,618,200
.

5) What is the net (overstatement)/understatement of the errors on the 2016 working capital?
A 17,000 B. 77,000 C. 50,000 D. 67,000
.

1) Jes Company revealed the following data for the year ended December 31, 2020:
• Inventory at January 1, 2020 had been overstated by P3,000
• Inventory at December 31, 2020 was understated by P5,000
• An insurance policy covering three years had been purchased on January 2, 2019, for P1,500. The entire amount was
charged as an expense in 2019.

During 2020, the entity received a P1,000 cash advance from a customer for merchandise to be manufactured and shipped
during 2021. The P1,000 had been credited to sales revenue. The gross profit on sales is 50%. Net income for 2020 per book
was P20,000. What is the proper net income for 2020?
A 26,500 B. 23,500 C. 16,500 D. 20,500
.

2) During 2017, Ghost Company discovered that the ending inventories reported on its financial statements were incorrect by the
following amounts: 2015 – P60,000 understated; 2016 – P75,000 overstated. Ghost uses the periodic inventory system to
ascertain year-end quantities that are converted to peso amounts using the FIFO cost method. By how much would retained
earnings at January 1, 2017 be misstated prior to any adjustments for these errors and ignoring income taxes?
A 75,000 overstated B. 75,000 understated C. 15,000 overstated D. 15,000 understated
.

3) Corgi Industries showed profit before income taxes of P250,000 on December 31, 2017 on December 31, 2017. On your year-
end verification of the accounts, you discovered the following:
• P100,000 worth of merchandise was purchased in 2017 and included in the ending inventory. However, the purchase was
recorded only in 2018.
• A merchandise shipment valued at P150,000 was properly recorded as purchase at year-end. Since the merchandise was
still at port area, they were inadvertently omitted from inventory balance at December 31, 2017.
• Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2017. The entire amount was
reported as income upon receipt.
• Insurance premium covering the period from July 1, 2017 to July 1, 2019, amounting to P120,000 was paid and recorded as
expense in July 2017. The company did not make any adjustment at the end of the year.

• PAGE 3 OF 15•
 What is the correct profit before income taxes for the year 2017?
A 370,000 B. 340,000 C. 280,000 D. 230,000
.

4) Upon inspection of the records of Redbone Company, the following facts were discovered for the year ended December 31,
2017:
• A fire insurance premium of P40,000 was paid and charged as insurance expense in 2017. The fire insurance policy covers
one year from April 1, 2017.
• Inventory on January 1, 2017 was understated by P80,000.
• Inventory on December 31, 2017 was understated by P120,000.
• Business taxes of P55,000 for fourth quarter of 2017 were paid on January 20, 2018 and charged as expense in 2018.
• The profit of Redbone Company for the year ended December 31, 2017 before any adjustments for the given information is
P1,550,000.

What is the correct profit of Redbone Company for the year ended December 31, 2017?
A 1,550,000 B. 1,505,000 C. 1,485,000 D. 1,445,000
.

5) Profit for Saint Bernard Company for the years 2016 and 2017 is shown below. A review of the accounts, however, disclosed
the following errors:
2016 2017
Profit 246,500 312,500
Inventory understatement at year-end 25,000
Computer purchased at year-end charged to expense (10-year life) 40,000
Unearned rent received taken into income 18,000
Accrued taxes unrecorded 30,000
Merchandise purchased on account recorded as liability but not included in inventory 50,000

The correct profit for 2017 is

A 312,500 B. 289,500 C. 239,500 D. 235,500
.

6) X Company began operations on January 1, 2016. Prior to any adjustments, the retained earnings account is reproduced below.
Date Description Debit Credit Balance
January 1, 2016 -- -- -- 0
December 31, 2016 Profit for the year 1,200,000 1,200,000
August 31, 2017 Dividends paid 400,000 800,000
December 31, 2017 Profit for the year 1,500,000 2,300,000

The company failed to property recognized accruals and prepayments. Selected accounts revealed the following information:
2016 2017
Prepaid expenses 80,000 60,000
Accrued expense 25,000 40,000
Unearned income 110,000 50,000
Accrued income 70,000 100,000

What is the adjusted balance of X Company’s retained earnings at December 31, 2017?
A 2,570,000 B. 2,385,000 C. 2,370,000 D. 2,355,000
.

Use the following information for the next four (4) questions:
You audit the accounts of Doore Company for the first time in 2024. During the audit you discovered the following info:
Omission of: 2022 2023 2024
Accrued expense 15,000 7,000 22,000
Accrued income 8,000 9,000 5,000
Prepaid expense 16,000 12,000 6,000
Unearned income 11,000 13,000 10,000

1) What is the understatement (overstatement) for the net income in 2022?

A 2,000 over B. 2,000 under C. 3,000 over D. 3,000 under
.

2) What is the understatement (overstatement) for the net income in 2023?

A 22,000 under B. 21,000 over C. 3,000 over D. 3,000 under
.

• PAGE 4 OF 15•
3) What is the understatement (overstatement) for the net income in 2024?
A 22,000 under B. 21,000 over C. 3,000 over D. 22,000 under
.

4) What is the understatement (overstatement) for the retained earnings 2024 ending balance?
A 22,000 under B. 21,000 over C. 3,000 over D. 3,000 under
.

PROBLEM 4
You have been engaged to audit the accounts of Drum Company for the first time in 2024. During the audit you discovered the
following information.
2023 2024
The following were omitted at each year-end:
Salaries payable 12,000 5,000
Accrued interest income 4,000 3,000
Unearned rental income 14,000 15,000
Prepaid insurance 3,000 5,000
Collections from customers at year-end, recorded as sales but deliveries were not made until the 31,000 25,000
following year.
Payment to suppliers at year end, recorded as purchases but merchandise were not received until the 10,000 7,000
following year.
Routinary repairs cost charged to equipment account at the beginning of each year. Depreciation rate 60,000 80,000
on fixed asset was at 20%.
Unadjusted net income 245,000 310,000
5) What is the adjusted net income for 2023?
A 157,000 B. 133,000 C. 123,000 D. 93,000
.
6) What is the adjusted net income for 2024?
A 268,000 B. 204,000 C. 205,300 D. 193,700
.
7) What is the retroactive adjustment to the retained earnings at the beginning of 2024?
A 88,000 debit B. 88,000 credit C. 102,000 debit D. 64,000 credit
.

ANSWER: A, A, A
2023 2024
Unadjusted 245,000 310,000
Omission of salaries payable 2023 (12,000) 12,000
Omission of salaries payable 2024 (5,000)
Omission of accrued interest income 2023 4,000 (4,000)
Omission of accrued interest income 2024 3,000
Omission of unearned rental income 2023 (14,000) 14,000
Omission of unearned rental income 2024 (15,000)
Omission of prepaid insurance 2023 3,000 (3,000)
Omission of prepaid insurance 2024 5,000
Overstatement of sales 2023 (31,000) 31,000
Overstatement of sales 2024 (25,000)
Overstatement of purchases 2023 10,000 (10,000)
Overstatement of purchases 2024 7,000
Understatement of repair expense (60,000) (80,000)
Overstatement of depreciation 2023 (60,000 x 20%) 12,000
Overstatement of depreciation 2024 (60,000 x 20%) + (80,000 x 20%) 28,000
Adjusted net income 157,000 268,000

Net income 2023 unadjusted 245,000

Net income 2023 adjusted 157,000
Overstatement of net income closed to retained earnings 88,000

Use the following information for the next three (3) questions:
Moira Company began operations on January 1, 2015. Financial statements for the years 2015 and 2016 contained the following
errors:
2015 2016
Ending inventory 700,000 Under 500,000 Over
Depreciation 150,000 Under
Insurance expense 50,000 Over
Prepaid insurance 50,000 Under

• PAGE 5 OF 15•
In addition, on December 31, 2016, a fully depreciated equipment was sold for P100,000 cash but the sale was not recorded until
2017. Ignoring income tax, what is the total effect of the errors on

8) Net income for 2015?

A 600,000 under B. 550,000 under C. 600,000 over D. 550,000 over
.

9) Net income for 2016?

A 1,250,000 under B. 1,250,000 over C. 1,150,000 under D. 1,150,000 over
.

10) Working capital on December 31, 2016?

A 500,000 over B. 500,000 under C. 400,000 over D. 400,000 under
.

Use the following information for the next two (2) questions:
Income statement prepared by the bookkeeper reported P145,000 net income for 2015 and P185,000 net income for 2016. Further
review of the records reveals that the following items were handled improperly.
• Rent of P6,500 was received from a lessee on December 23, 2015. It was recorded as income at that time even though the rental
pertains to 2016.
• Salaries payable on December 31 have been consistently omitted from the records of that date and have been recorded as
expenses when paid in the following year. The salary accruals recorded in this manner were:
December 31, 2014 5,500
December 31, 2015 7,500
December 31, 2016 4,700
• Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at
the end of each year have been ignored, and no entry has been made for them.

11) What is the corrected net income for 2015?

A 146,700 B. 144,200 C. 139,300 D. 133,700
.

12) What is the corrected net income for 2016?

A 197,700 B. 190,900 C. 185,600 D. 184,700
.

Use the following information for the next two (2) questions:
Egyptian Mau Company decided on January 2, 2016, to review its accounting practices. This is due to changing economic
conditions and to make its financial statements more comparable to those other companies in its industry.

The following will be effective as of January 1, 2016:

• Egyptian Mau decided to change its allowance for bad debts from 2% to 4% of its outstanding receivable balance. Egyptian
Mau receivable balance at December 31, 2016, was P690,000. Allowance for bad debts had a debit balance of P2,000 before
adjustments.
• Egyptian Mau decided to use the straight-line method of depreciation on its equipment instead of the sum-of-years’ digit
method. It was also decided that this asset has 10 more years of useful life as of January 2, 2016. The equipment was purchased
on January 1, 2006, at a cost of P1,100,000. On the acquisition date, it was estimated that the equipment would have a 15-year
useful life with no residual value.

13) The entry to record the current year provision for bad debts is
A. Bad debt expense 29,600 C. Bad debt expense 25,600
Allowance for bad debt 29,600 Allowance for bad debt 25,600
B. Allowance for bad debts 29,600 D. Allowance for bad debt 25,600
Bad debt expense 29,600 Bad debt expense 25,600

14) What is the amount of depreciation on equipment for the current year?
A 45,833 B. 32,083 C. 13,750 D. 9,167
.

15) On January 1, 2016, management Exotic Company decided to make a revision in the estimates associated with its production
equipment. The equipment was acquired on January 3, 2014, for P800,000 and had been depreciated using straight-line method.
At the date of acquisition, it had an estimated useful life of 10 years with an estimated salvage value of P50,000. Management
has determined that the equipment’s remaining useful life is four years and that is has an estimated residual value of
P60,000.What is the amount of depreciation expense that should be recognized in 2016 as a result of the changes in estimates?

• PAGE 6 OF 15•
 A 150,000 B. 147,500 C. 125,000 D. 75,000
.

16) On January 1, 2013, Bushwack, Inc. purchased an equipment for P650,000. The machine had an estimated useful life of 8 years
(with no residual value) at the acquisition date. On January 1, 2016, Bushwack determined, as a result of additional information,
that the equipment had an estimated useful life of 10 years from the acquisition date with no residual value. What is the amount
of depreciation expense on the equipment for the year ended December 31, 2016?
A 92,850 B. 65,000 C. 58,036 D. 40,625
.

17) The correct income statement of Calamity Company shows a net income of P175,000 for the year ended December 31, 2016.
Adjustments were made for the following errors:
• December 31, 2015, inventory overstated by P22,500.
• December 31, 2016, inventory understated by P37,500.
• A P10,000 customer’s deposit received in December 2016, was credited to sales in 2016. The goods were actually shipped
in January 2017.

What is the unadjusted net income of Calamity Company for the year ended December 31, 2016?
A 234,000 B. 225,000 C. 170,000 D. 125,000
.

PROBLEM 3
Havana Brown Company reported the following net income figures without knowledge of inventory errors.
Year Reported Net Income Error in Ending Inventory
2019 500,000 Overstated 50,000
2020 520,000 Overstated 90,000
2021 540,000 Understated 110,000
2022 560,000 No error
2023 580,000 Understated 20,000
2024 600,000 Overstated 100,000

Questions: Based on the above and the result of your audit, compute the corrected profit for the following year:
18) 2019
A 550,000 B. 450,000 C. 360,000 D. 500,000
.
19) 2020
A 480,000 B. 570,000 C. 560,000 D. 430,000
.
20) 2021
A 740,000 B. 650,000 C. 630,000 D. 560,000
.
21) 2022
A 670,000 B. 650,000 C. 470,000 D. 450,000
.
22) 2023
A 600,000 B. 580,000 C. 560,000 D. 500,000
.
23) 2024
A 580,000 B. 520,000 C. 500,000 D. 480,000
.

ANSWER: B, A, A, D, A, D
2019 2020 2021 2022 2023 2024
Unadjusted 500,000 520,000 540,000 560,000 580,000 600,000
2019 error (50,000) 50,000
2020 error (90,000) 90,000
2021 error 110,000 (110,000)
2022 error
2023 error 20,000 (20,000)
2024 error (100,000)
Adjusted 450,000 480,000 740,000 450,000 600,000 480,000

24) A change in accounting estimate is

• PAGE 7 OF 15•
 A. An adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected
future benefits and obligations associated with that asset or liability.
B. A change in the specific principles, bases, conventions, rules and practices applied b an entity in preparing and presenting
financial statements.
C. Omission from, and misstatement, in an entity’s financial statements for one or more prior periods arising from a failure to
use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken
into account in preparing those statements.
D. All of the above.

25) A change in accounting estimate is accounted for by

A. Prospective application C. Retrospective restatement
B. Retrospective application D. Any of the above

26) Prospective application of recognizing the effect of a change in an accounting estimate means
A. Recognizing the effect of the change in the accounting estimate in the current and future periods affected by the change.
B. Applying a new accounting policy to transactions, other events and conditions aas if that policy had always been applied.
C. Correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period
error had never occurred.
D. Any of the above.

27) Philippine Financial Reporting Standards (PFRSs) are Standards and Interpretations adopted by the Financial Reporting
Standards Council (FRSC). They comprise:
A. Philippine Financial Reporting Standards PFRSs C. Interpretations
B. Philippine Accounting Standards PASs D. All of these

28) During 2011, German Pinscher Company decided to change from Average cost formula for inventory valuation to the FIFO
cost formula. Inventory balances under each method were as follows:
Average FIFO
January 1 4,000,000 4,800,000
December 31 8,000,000 8,400,000

Income tax rate is 30%. What is the net cumulative effect of the accounting change in German Pinscher Company’s opening
retained earnings balance?
A 400,000 increase B. 560,000 decrease C. 280,000 increase D. 560,000 increase
.

29) On January 1, 2011, Goldendoodle Company acquired an equipment for P4,000,000. The equipment will be depreciated using
the straight line method over 20 years. The estimated residual value is P400,000.

In 2016, following a reassessment of the realization of the expected economic benefits from the equipment, Goldendoogle
Company changed its depreciation method to sum-of-the-years digits (SYD). The remaining useful life of the asset is estimated
to be 4 years and the residual value is changed to P200,000. How much is the depreciation expense in 2016?
A 1,233,560 B. 1,140,000 C. 1,160,000 D. 1,110,669
.

30) On January 1, 2013, Ganos, Inc. acquired equipment for P100,000 with an estimated 10-year useful life. Ganos estimated a
P10,000 residual value and used the straight-line method of depreciation. During 2017, after its 2016 financial statements had
been issued. Ganos determined that, due to obsolescence, this equipment’s remaining useful life was only four more years and
its residual value would be P4,000. In Ganos’ December 31, 2017, balance sheet, what was the carrying amount of this asset?
A 51,500 B. 49,000 C. 41,500 D. 39,000
.

31) On January 2, 2016, Froze Company purchased a machine for P264,000 and depreciated it by the straight-line method using an
estimated useful life of eight years with no residual value. on January 2, 2019, Froze determined that the machine had a useful
life of six years from the date of acquisition and will have a residual value of P24,000. An accounting change was made in 2019
to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 2019, of
A 176,000 B. 160,000 C. 154,000 D. 146,000
.

32) Frieza Corporation frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at
a 12% interest rate with interest payable at maturity. Frieza repaid each loan on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
01/01/11 5,000 10/31/12 12 months
02/01/12 15,000 07/31/12 6 months

• PAGE 8 OF 15•
 05/01/12 8,000 01/31/13 9 months

Frieza records interest expense when the loan are repaid.as a result, interest expense of P1,500 was recorded in 2012. If no
correction is made, by what amount would 2012 interest expense be understated?
A 720 B. 640 C. 620 D. 540
.

Use the following information for the next three (3) questions:
Doola, Inc. is a calendar year corporation. Its financial statements for the year 2012 and 2011 contained errors as follows:
2012 2011
Ending inventory 1,000 understated 3,000 overstated
Depreciation expense 800 understated 2,500 overstated

33) Assume that the proper correcting entries were made at December 31, 2011. By how much will 2012 income before income
taxes be overstated or understated?
A 200 understated B. 500 overstated C. 2,700 understated D. 540 understated
.

34) Assume that no correcting entries were made at December 31, 2011. Ignoring income taxes, by how much will retained earnings
at December 31, 2012, be overstated or understated?
A 200 understated B. 500 overstated C. 2,700 understated D. 3,200 understated
.

35) Assume that no correcting entries were made at December 31, 2011, or December 31, 2012, and that no additional errors
occurred in 2013. Ignoring income taxes, by how much will working capital at December 31, 2013, be overstated or
understated.
A 1,700 understated B. 1,000 overstated C. 1,000 understated D. 0
.

Use the following information for the next three (3) questions:
The bookkeeper of Dende Company, which has an accounting year ending December 31, made the following errors:
• A P1,000 collection from a customer was received on December 29, 2010 but not recorded until the date of its deposit in the
bank, January 4, 2011.
• A supplier’s P1,600 invoice for inventory items received in December 2010 was not recorded until January 2011. (inventories at
December 31, 2010 and 2011, were stated correctly, based on physical count.)
• Depreciation for 2010 was understated by P900. In September 2010, a P200 invoice for office supplies was charged to the
Utilities Expense account. Office supplies are expensed as purchased.
• December 31, 2010, sales on account of P3,000 were recorded in January 2011.

Assume that no other errors have occurred and that no correcting entries have been made. Ignore income taxes.
36) Profit for 2010 was
A 500 understated B. 2,100 understated C. 2,500 overstated D. Neither over nor under
.

37) Assume the same facts as above, working capital at December 31, 2010, was
A 3,000 understated B. 500 understated C. 1,400 understated D. Neither over nor under
.

38) Assume the same facts as above, total assets at December 31, 2010 were
A 2,500 overstated B. 2,100 overstated C. 2,500 understated D. 2,100 understated
.

Use the following information for the next two (2) questions:
On January 10, 2012, prior to the authorization of Wolfhound Company’s December 31, 2011 financial statements for issue, the
accountant of Wolfhound received a bill for an advertisement made in the month of December 2011 amounting to P1,600,000. This
expense was not accrued as of December 31, 2011.

39) The correcting entry, if the books are still open, includes
A. A debit to advertising expense for P1,600,000 C. A debit to retained earnings for P1,600,000
B. A credit to advertising income for P1,600,000 D. A credit to retained earnings for P1,600,000

40) The correcting entry, if the books are already closed, includes
A. A debit to advertising expense for P1,600,000 C. A debit to retained earnings for P1,600,000
B. A credit to advertising income for P1,600,000 D. A credit to retained earnings for P1,600,000

• PAGE 9 OF 15•
41) On January 15, 2013 while finalizing its 2012 financial statements, Jack Company discovered that depreciation expense
recognized in 2011 is overstated by P1,600,000. Ignoring income tax, the entry to correct the prior period error includes
A. A debit to depreciation expense for P1,600,000 C. A credit to depreciation expense for P1,600,000
B. A debit to retained earnings expense for P1,600,000 D. A debit to accumulated depreciation for P1,600,000

42) Bombay Company has decided to switch from using the FIFO method of inventory valuation to using the average cost method.
In the first accounting period where the change is made, opening inventory valued by the FIFO method was P53,200. Closing
inventory valued by the average cost method was P59,800. Total purchases during the period were P136,500. Using the average
cost method, opening inventory would have been valued at P56,200. What is the cost of goods that should be included in the
income statement for the period?
A 140,100 B. 135,900 C. 132,900 D. 129,900
.

43) Abyssinian Company reported a retained earnings balance of P5,000,000 at January 1, 2016. In august 2016, Abyssinian
determined that insurance premiums of P600,000 for the three-year period beginning January 1, 2015, had been paid and fully
expensed in 2015. Abyssinian has a 35% income tax rate. What amount should Abyssinian report as adjusted beginning retained
earnings in 2016?
A 5,390,000 B. 5,260,000 C. 5,130,000 D. 4,740,000
.

44) After the issuance of its 2015 financial statements, Bobtail, Inc. discovered a computational error of P150,000 in the calculation
of its December 31, 2015 inventory. The error resulted in a P150,000 overstatement in the cost of goods sold for the year ended
December 31, 2015. In October 2016, Bobtail paid the amount of P500,000 in settlement of litigation instituted against it during
2015. Ignoring income taxes. In the 2016 financial statements, the December 31, 2015 retained earnings balance, as previously
reported, should be adjusted by a
A 150,000 credit B. 150,000 debit C. 500,000 debit D. 500,000 credit
.

45) Wirehair Company’s statements for 2014 and 2015 included the following errors:
December 31, 2014 inventory understated 2,000,000
December 31, 2015 inventory overstated 1,000,000
Depreciation for 2014 understated 400,000
Depreciation for 2015 overstated 800,000

How much should retained earnings be retroactively adjusted on January 1, 2016?

A 1,400,000 increase B. 1,400,000 decrease C. 600,000 increase D. 600,000 decrease
.

46) Balinese Company bought 30% of Bengal Corporation in 2016. During 2016, Bengal reported net income in the amount of
P400,000 and declared and paid dividends in the amount of P50,000. Balinese mistakenly accounted for the investment using
the cost method instead of the equity method. What effect would this error have on the investment account and net income,
respectively, for 2016?
Investment account Net income Investment account Net income
A. 120,000 under 105,000 over C. 105,000 under 105,000 under
B. 105,000 over 105,000 under D. 120,000 over 120,00 over

47) On January 1, 2014, Birman Company purchased for P240,000 a machine with a useful life of 10 years and no salvage value.
the machine was depreciated by the double-declining balance method and the carrying amount of the machine was P153,600 on
December 31, 2015. Birman changed to the straight-line method on January 1, 2016. Birman can justify the change. What
should be the depreciation expense on this machine for the year ended December 31, 2016?
A 30,720 B. 24,000 C. 19,200 D. 15,360
.

48) During the course of your examination of the financial statement of Burmese Company, a new client for the year ended
December 31, 2016, you discover the following:
• Inventory at January 1, 2016, had been overstated by P3,000.
• Inventory at December 31, 2016, was understated by P5,000.
• An insurance policy covering three year had been purchased on January 2, 2015, for P1,500. The entire amount was
charged as an expense in 2015.

During 2016, the company received a P1,000 cash advance from customer for merchandise to be manufactured and shipped
during 2017. The P1,000 had been credited to sales revenues. The company’s gross profit on sales is 50%.

• PAGE 10 OF 15•
 Net income reported on the 2016 income statement (before reflecting any adjustments for the above items) is P20,000. The
proper net income for 2016 is
A 26,500 B. 23,500 C. 20,500 D. 16,500
.

Use the following information for the next three (3) questions:
The income statement of Scout Company for the year ended December 2015, 2016 and 2017 indicated the following net incomes:
2015 – P120,000 2016 – P185,000 2017 – P150,000

An examination of the accounting records for these years indicates that several errors were made in arriving at the net income
amounts reported. The following errors were discovered:
• Accrued interests on notes receivable were consistently omitted from the records. The amounts omitted were:
2015 – P10,000 2016 – P14,000 2017 – P16,000
• The merchandise inventory at December 31, 2016 was overstated by P9,000 as the result of errors made in the footings and
extensions on the inventory sheets.
• Unexpired insurance of P12,000 applicable to 2017 was expensed in 2016.
• Accrued utilities of P2,000 was not recorded on December 31, 2015.
• On January 2, 2016, a piece of equipment costing P40,000 was sold for P13,000. At the date of sale, the equipment had an
accumulated depreciation of P24,000. The cash received was recorded as income in 2016. In addition, depreciation was
recorded for this equipment in both 2016 and 2017 at the rate of 10% of cost.

49) The adjusted net income in 2015 is

A 132,000 B. 130,000 C. 128,000 D. 118,000
.

50) The adjusted net income in 2016 is:

A 188,000 B. 186,000 C. 182,000 D. 178,000
.

51) The adjusted net income in 2017 is:

A 153,000 B. 151,000 C. 149,000 D. 145,000
.

Use the following information for the next three (3) questions:
Silhouette Corporation reported profit for the year 2014 and 2015 at P550,000 and P700,000, respectively. Your audit of the
company’s account disclosed the need for adjustments as follows:
2014 2015
Overstatement of ending inventory due to error in pricing 29,000 33,000
Omission of depreciation on newly-acquired equipment 15,000 15,000
Understatement of commission receivable 22,000 18,000
A purchase of merchandise was not recorded until the following year, and also was not included in the 60,000
ending inventory

52) The adjusted profit for 2015 was

A 737,000 B. 710,000 C. 700,000 D. 677,000
.

53) What is the effect of the foregoing errors (overstatement) on total assets at December 31, 2015?
A 66,000 B. 45,000 C. 36,000 D. 30,000
.

54) What is the effect on the foregoing errors on retained earnings at December 31, 2014?
A 82,000 over B. 67,000 over C. 38,000 under D. 22,000 over
.

55) Sir Benzington failed to recognized accruals and prepayments during its first year of operations. The pre-tax earnings, accruals
and prepayments at the end of the year were:
Pre-tax profit 5,000,000
Items not recognized at year-end were as follows:
Prepaid insurance 200,000
Accrued wages 250,000
Rent revenue collected in advance 300,000
Interest receivable 100,000
The correct amount of pre-tax profit should be

• PAGE 11 OF 15•
 A 5,250,000 B. 5,000,000 C. 4,950,000 D. 4,750,000
.

ANSWER: D
Pre-tax profit 5,000,000
Items not recognized at year-end were as follows:
Prepaid insurance 200,000
Accrued wages (250,000)
Rent revenue collected in advance (300,000)
Interest receivable 100,000
Adjusted net profit 4,750,000

56) Swiftblade Company’s statements for 2014 and 2015 included errors as follows:
Year Ending Inventory Depreciation
2014 200,000 Understated 50,000 Understated
2015 300,000 Overstated 100,000 Overstated

For how much should retained earnings be retrospectively adjusted at January 1, 2016?
A 250,000 increase B. 250,000 decrease C. 200,000 decrease D. 400,000 decrease
.

Use the following information for the next two (2) questions:
Tarot Manufacturing Company began operations on January 1, 2014. Financial statements for the years end December 31, 2014 and
2015, contained the following errors:
2014 2015
Ending inventory 16,000 Understated 15,000 Overstated
Depreciation expense 6,000 Understated
Insurance expense 10,000 Overstated 10,000 Understated
Prepaid insurance 10,000 Understated

In addition, on December 31, 2015, fully depreciated machinery was sold for P10,800 cash, but the sale was not recorded until 2016.
There were no other errors during 2014 or 2015 and no corrections have been made for any of the errors.

57) Ignoring income taxes, what is the total effect of the errors on 2015 profit?
A 30,200 over B. 11,000 over C. 5,800 over D. 1,800 under
.

58) Ignoring income taxes, what is the total effect of the errors on the amount of working capital at December 31, 2015?
A 9,800 under B. 6,000 under C. 5,800 under D. 4,200 over
.

59) The Valkyrie, Inc. has determined its 2015 profit to be P5,000,000. In an initial audit of the company’s financial statements, you
determined the following:
• Revenue received in advance in 2015 of P250,000 was credited to a revenue account when received. Of the total, P50,000
was earned in 2015 , P120,000 will be earned in 2016, and the remainder will be earned in 2017. No adjustment was made
at the end of 2015.
• P150,000 unrealized loss on FVPL (financial assets at fair value through profit or loss) in 2015 was erroneously debited to
other comprehensive income account.

What is the corrected profit for the year 2015?

A 4,930,000 B. 4,850,000 C. 4,650,000 D. 4,600,000
.

Use the following information for the next three (3) questions:
Wildsoul Company showed pre-tax income of P2,500,000 for the year ended December 31, 2015. On your year-end verification of
the transactions of the Company, you discovered the following errors:
• P1,000,000 worth of merchandise was purchased in 2015 and included in the ending inventory. However, the purchase was
recorded only in 2016.
• A merchandise shipment valued at P1,500,000 was properly recorded as purchases at year-end. The merchandise was
inadvertenly omitted from the physical count, since it has not arrived by December 31, 2015.
• Value added tax for the fourth quarter of 2015, amounting to P500,000, was included in the Sales account.
• Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2015. The entire * amount was
reported as revenue upon receipt.
• Rent paid on building covering the period from July 1, 2015 to July 1, 2016, amounting to P1,200,000, was paid and recorded
as expense on July 1, 2015. The company did not make any adjustment at the end of the year.

• PAGE 12 OF 15•
60) The correct pre-tax profit for 2015 should
A 3,400,000 B. 3,000,000 C. 2,900,000 D. 2,400,000
.

61) What is the net effect of the foregoing errors on the total assets at December 31, 2015?
A 2,100,000 under B. 1,500,000 under C. 1,100,000 under D. 600,000under
.

62) What is the total understatement of the total liabilities at December 31, 2015?
A 3,200,000 B. 1,700,000 C. 1,500,000 D. 1,200,000
.

63) Upon inspection of the records of Adrenaline Company, the following facts were discovered for the year ended December 31,
2015:
• A fire insurance premium of P40,000 was paid and charged as insurance expense in 2015. The fire insurance policy covers
one year from April 1, 2015.
• Inventory on January 1, 2015 was understated by P80,000.
• Inventory on December 31, 2015 understated by P120,000.
• Expenses of P55,000 incurred during December were recorded when paid in January 2016.
• On December 5, 2015, Adrenaline credited to sales a cash advance of P100,000 received from a customer for goods
delivered in January 2016. The company’s gross profit on sales is 40%.
• The profit of Adrenaline Company for the year ended December 31, 2015, before any adjustment for the above information,
is P1,550,000.

What is Adrenaline Company’s corrected profit for the year ended December 31, 2015?
A 1,505,000 B. 1,445,000 C. 1,425,000 D. 1,365,000
.

64) Arachna Inc. has determined the following information related to operations for 2015:
Revenue from sales 7,000,000
Expenses 4,000,000
Income before income taxes 3,000,000

In reviewing the records, you discovered the following items:

• During 2015, the company discovered an error in depreciation in 2014. The correction of this error, which has not been
recorded, will result in an increase in depreciation for 2014 of P200,000.
• During 2015, the company sustained a loss of P400,000 because of flood, which destroyed its inventory. The company
charged retained earnings and credited inventory for P400,000.

How much is the correct profit before tax for the year 2015?
A 3,400,000 B. 3,000,000 C. 2,600,000 D. 2,400,000
.

65) Accrued salaries payable of P70,000 were not recorded at December 31, 2014. Prepaid insurance of P30,000 at December 31,
2015 were erroneously treated as expense. Neither of these errors was discovered nor corrected. The effect of these two errors
would cause
A. 2015 profit to be understated P100,000 and December 31, 2015 retained earnings to be understated P30,000.
B. 2014 profit and December 31, 2014 retained earnings to be understated P70,000 each.
C. 2014 profit to be overstated P40,000 and 2015 profit to be understated P30,000.
D. 2015 profit and December 31, 2015 retained earnings to be understated P30,000 each.

Use the following information for the next two (2) questions:
Blood Hunter Company purchased pressing machinery that cost P54,000 on January 4, 2013. The entire cost was recorded as an
expense. The machinery has a nine-year life and a P50,400 depreciable cost. The error was discovered on December 20, 2015.

66) Ignoring income tax consideration, Blood Hunter’s statement of comprehensive income for the year ended December 31, 2015
should show depreciation expense in the amount of
A 48,400 B. 32,700 C. 16,800 D. 5,600
.

67) Before the correction was made, the January 1, 2015, retained earnings was understated by
A 54,000 B. 48,400 C. 42,800 D. 37,200

• PAGE 13 OF 15•
 .

68) A company using a periodic inventory system neglected to record a purchase of merchandise on account at year-end. This
merchandise was omitted from the year-end physical count. How will these errors affect assets, liabilities, and shareholders’
equity and net earnings for the year?
Assets Liabilities Shareholders’ equity Net Earnings
A. No effect Understate Overstate Overstate
B. No effect Overstate Understate Understate
C. Understate Understate No effect No effect
D. Understate No effect Understate Understate

69) Forsaken Corporation reports on a calendar-year basis. Its 2015 and 2016 financial statement contained the following errors:
2015 2016
Over (under) statement of ending inventory (10,000) 4,000
Depreciation understatement 4,000 6,000
Failure to accrue salaries at year-end 8,000 12,000

As a result of the above errors, 2016 income would be

A 24,000 over B. 22,000 over C. 16,000 over D. 4,000 over
.

70) Ophelia Company purchased equipment on January 1, 2013 for P500,000, estimating a four-year useful life and no residual
value. In 2013 and 2014, Ophelia depreciated the asset using the sum-of-years’-digit method. In 2015, Ophelia changed to
straight-line depreciation for this equipment. What depreciation would Ophelia record for the year 2015 on this equipment?
A 175,000 B. 150,000 C. 125,000 D. 75,000
.

71) On January 1, 2015, Skrap Company sold a parcel of land to Dog Company with a carrying amount of P400,000 and receive in
exchange a P900,000 non-interest bearing note with a maturity date of January 1, 2019. There was no established exchange
price for the land and the note has no ready market. The prevailing rate for a note of this type at exchange date was 12%.
Assuming that Skrap Company recorded the sale for P900,000, retained earnings after closing at December 31, 2016 is
A Correctly stated B. 328,034 overstated C. 259,358 overstated D. 182,526 overstated
.

72) On January 1, 2013, Tempest Company sold goods to Dog Company for P3,600,000. Dog Company signed a noninterest
bearing note requiring payment of P300,000 annually starting December 31, 2013. The prevailing rate of interest for this type of
note at date of issuance was 12%. On January 1, 2016 it was discovered that Tempest Company recorded the sales transaction
with Dog Company for P3,600,000. The prior period adjustment to be made to retained earnings on January 1, 2016 is
A 1,798,435 B. 1,498,150 C. 1,401,805 D. 1,101,525
.

73) In 2020, Vindicator Company which uses the periodic system of recording inventory, reported a net income of P200,000. The
correct net income was P250,000. It was determined that the beginning and ending inventory were overstated by P20,000 and
P15,000 respectively. The remaining error was due to purchases which was
A 15,000 overstated B. 15,000 understated C. 45,000 understated D. 45,000 overstated
.

74) In 2022, Geomancer Company reported net income of P18,000. The correct net income was P25,000. It was determined that the
ending inventory was overstated by P3,000, while the purchases was understated by P1,000. The only other error was with the
beginning inventory which would be
A 11,000 overstated B. 5,000 overstated C. 9,000 understated D. 3,000 understated
.

75) Accrued salaries payable of P102,000 were not recorded at December 31, 2014 by Voodoo Jester Company. Also office
supplies on hand of P48,000 at December 31, 2015 were erroneously treated as expense instead of supplies inventory. Neither
of these errors was discovered nor corrected. What was the effect of these two errors?
A. 2015 net income understated P150,000 and December 31, 2015 retained earnings understated P48,000.
B. 2014 net income and December 31, 2014 retained earnings understated P102,000.
C. 2014 net income overstated P54,000 and 2015 net income understated P48,000.
D. 2015 net income and December 31, 2015 retained earnings understated P48,000.

76) On January 1, 2012, Legionnaire Company purchased for P9,600,000 a machine with a useful life of ten years and a residual
value of P400,000. The machine was depreciated by double declining balance. The entity changed to the straight-line method on

• PAGE 14 OF 15•
 January 1, 2014. The residual value did not change. What is the depreciation expense on this machine for the year ended
December 31, 2014?
A 920,000 B. 768,000 C. 718,000 D. 574,400
.

77) On January 1, 2011, Palencia Company acquired machinery for a total cost of P20,000,000 and estimated residual value of
P2,000,000. The machinery is depreciated using the straight line method over a period of 10 years. On January 1, 2014,
Palencia Company revised the total useful life of the asset to 15 years from acquisition date and the residual value to
P2,600,000. What is the depreciation for 2014?
A 1,400,000 B. 1,300,000 C. 1,200,000 D. 1,000,000
.

78) On January 1, 2011, Navarro Company acquired machinery for a total cost of P20,000,000. The machinery is depreciated using
the double declining balance method over a period of 10 years. On January 1, 2014, Navarro Company changed its depreciation
method to straight line method. What is the depreciation expense for 2014?
A 1,462,847 B. 1,170,285 C. 1,024,000 D. 819,200
.

79) On January 1, 2011, Navarro Company acquired machinery for a total cost of P20,000,000. The machinery is depreciated using
the SYD method over a period of 10 years. On January 1, 2014, Navarro Company changed its depreciation method to double
declining balance method. What is the depreciation expense for 2014?
A 3,740,072 B. 2,908,945 C. 2,036,636 D. 1,018,182
.

80) Soul’s Sight Company owned a machine that was bought on January 1, 2011 for P7,520,000. The machine was estimated to
have a useful life of five years and a residual value of P480,000. The entity used the sum of the year’s digits method of
depreciation. At the beginning of 2014, the entity determined that the total useful life of the machine should have been four
years and the residual value of P704,000. What is the depreciation expense for 2014?
A 1,184,000 B. 1,408,000 C. 888,000 D. 755,200
.

• PAGE 15 OF 15•