PROBLEM 1

MIRANA CO.’s net income for 2012, 2013 and 2014 were P100,000, P145,000 and
P185,000; respectively. The following items were not handled properly. The retained
earnings in 2012 has a beginning balance of P50,000

a) Rent of P6,500 for 2015 was received from a lessee on December 23, 2014 and
recorded as outright income in 2014.

b) Salaries payable at the end of the following years are omitted:

December 31, 2011 P2,500
December 31, 2012 5,500
December 31, 2013 7,500
December 31, 2014 4,700

c) The following unused office supplies were omitted in the accounting records:
December 31, 2011 3,500
December 31, 2012 6,500
December 31, 2013 3,700
December 31, 2014 7,100

d) On January 1, 2012, the company completed major repairs on the company’s

machinery and equipment totaling P220,000, which was expensed outright. The said
equipment is 5 years old as of January 1, 2012. As of December 31, 2014, the
equipment had an original cost of P500,000 and a carrying value of P250,000.
REQUIREMENTS:
1) What is the correct net income for 2012, 2013 and 2014?
2) What is the correct depreciation expense for 2014?
3) What is the adjusted retained earnings balance at the end of 2012, 2013 and 2014?
4) What is the net adjustments on the beginning balance of retained earnings in 2012,
2013 and 2014?
5) What is the effect of the above errors on 2012, 2013 and 2014 working capital?

PROBLEM 2
KGA Co., who started in 2018, made the following errors:
a) December 31, 2018 inventory was understated by P25,000.
b) December 31, 2019 inventory was overstated by P40,000.
c) Purchases on account in 2018 were understated by P100,000 (not included in physical
count).
d) Advances to suppliers in 2019 totaling P130,000 were inappropriately charged as purchases.
e) December 31, 2018 prepaid insurance was overstated by P5,000.
f) December 31, 2018 unearned rent income was overstated by P26,000.
g) December 31, 2019 interest receivable was understated by P17,000.
h) December 31, 2019 accrued salaries payable was understated by P30,000.
i) Advances from customers in 2019 totaling P60,000 were inappropriately recognized as sales
but the goods were delivered in 2020.
j) Depreciation expense in 2018 was overstated by P7,200.
k) In 2019, 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. KGA’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 2020 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 2018, 2019 and
2020, respectively.
REQUIREMENTS:
1) What is the correct net income for 2018, 2019 and 2020?
2) What is the adjusted retained earnings balance at the end of 2018, 2019 and 2020?
3) What is the effect of the above errors on 2018, 2019 and 2020 working capital?