Correction of Errors – Problems

1. MMM Corporation, a manufacturer of a small tools, provided the following information from its
accounting records for the year ended December 31, 2018:

Inventory at December 31, 2018 P1,750,000

Accounts Payable at December 31, 2017 1,200,000
Net sales (net of sales return) 8,500,000

Goods that were in transit from a vendor to MMM on December 31, 2018. The invoice cost was
P50,000 and the goods were shipped FOB shipping point on December 29, 2018. What would be
the adjustments in inventory, accounts payable, net sales respectively

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a. 50,000 ; 50,000 ; No effect

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b. No effect ; 50,000 ; 50,000

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c. No effect ; No effect ; 50,000

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d. 50,000 ; No effect ; No effect

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2. On January 1, 2018, Jod Corporation acquired a machine at a cost of P500,000. It was to be

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depreciated on the straight-line method over a four-year period with no residual value. Because
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of a bookkeeping error, no depreciation was recognized in Jod’s 2018 financial statements. The
oversight was discovered during the preparation of Jod’s 2019 financial statements.
What is the depreciation expense on this machine for 2019?
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a. P250,000
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b. P125,000
c. P100,000
d. P150,000
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SOLUTION: 500,000/4 = 125,000

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For items 3-5

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The December 31 year-end financial statements of Segment Company contained the following errors:

2018 2019

Ending inventory P60,000 understated P54,000 overstated

Depreciation expense 12,000 understated

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 Insurance premiums of P45,000 were paid in 2018 covering the years 2018, 2019, and 2020. The
entire amount was charged to Insurance expense in 2018. Likewise, on December 31, 2019, a fully
depreciated machinery was sold for P96,000 but the cash sale was recorded only in January 2020. There
were no other errors during 2018 and 2017 and no correcting entries were made for made for any of
these errors. Ignore income tax consideration.

3. What is the total effect of the errors on the 2019 profit?

a. P33,000 understated
b. P33,000 overstated
c. P48,000 overstated
d. P27,000 understated

SOLUTION: 60,000 + 54,000 + 15,000 – 96,000 = 33,000 net overstatement

4. What is the overstatement or understatement in Segment’s working capital at December 31,

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2019 due to errors?
a. P72,000 understated

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b. P72,000 overstated
c. P57,000 understated

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d. P57,000 overstated
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SOLUTION: 54,000 – 15,000 – 96,000 = 57,000 net understatement
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5. What is the total effect of the errors on Segment’s retained earnings balance at December 31,
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2017?
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a. P45,000 understated
b. P45,000 overstated
c. P60,000 understated
ed d

d. P105,000 understated
ar stu

SOLUTION: 54,000 + 12,000 – 96,000 – 15,000 = 45,000 net understatement

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