Errors

Accruals & Deferrals Error – Counter Balancing

Numbers 1, 2 and 3
The Meow Company was organized on January 1, 2020, and since its inception has not recognized accruals and deferrals. Selected
accounts revealed the following information:
Accruals and Deferrals Not Recognized at Year-end 2020 2021 2022
Prepaid expenses 29,000 30,000 34,000
Unearned revenue 20,000 28,000 15,000
Accrued expenses 27,500 25,000 27,000
Accrued revenue 42,500 45,000 41,000

Year 2020 2021 2022

Profit (Loss) 240,000 (120,000) 200,000
Based on the above and the result of your audit, compute the corrected profit for the following year:
1) 2020
A. 319,000 profit
B. 264,000 profit
C. 216,000 profit
D. 246,000 profit
2) 2021
A. 98,000 loss
B. 122,000 loss
C. 118,000 loss
D. 127,000 loss
3) 2022
A. 233,000 profit
B. 211,000 profit
C. 222,000 profit
D. 244,000 profit
Counter & Non Counter Balancing
Numbers 4, 5 and 6
The December 31 year-end financial statements of Wiz Khalifa Company contained the following errors:
December 31, 2016 December 31, 2017
Ending inventory 48,000 understated 40,500 overstated
Depreciation expense 11,500 understated -----
An insurance premium of P330,000 was prepaid in 2016 covering the years 2016, 2017, and 2018. The entire amount was charged
to expense in 2016. In addition, on December 31, 2017, a fully depreciated machinery was sold for P75,000 cash, but the sale was
not recorded until 2018. There were no other errors during 2016 and 2017, and no corrections have been made for any of the errors.
Ignore income tax effects.
4) What is the total effect of the errors on Wiz Khalifa’s 2017 net income?
A. 123,500 overstatement
B. 27,500 overstatement
C. 192,500 understatement
D. 177,500 understatement
5) What is the total effect of the errors on the amount of Wiz Khalifa’s working capital at December 31, 2017?
A. 75,500 overstatement
B. 40,500 overstatement
C. 225,500 understatement
D. 144,500 understatement
6) What is the total effect of the errors on the balance of Wiz Khalifa’s retained earnings at December 31, 2017?
A. 156,000 understatement
B. 87,000 overstatement
C. 133,000 understatement
D. 85,000 understatement

Errors on Accruals / Deferrals, Inventory and PPE

Numbers 07, 08, 09, 10, 11 and 12

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In line with your audit with Inozent One, Inc. financial statements, the company accountant presented to you the balance
sheet that follows. You reviewed the client’s accounting records and books based thereon. You discovered that books of
accounts are in agreement in the said balance sheet as presented below:

INOZENT ONE, INC.

STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2022
Asset Liabilities and Shareholder’s Equity
Cash 80,000 Accounts payable 32,000
Accounts receivable 160,000 Notes payable 64,000
Notes receivable 48,000 Capital stock 160,000
Inventories 400,000 Retained earnings 432,000
Total 688,000 Total 688,000
Additional notes:

a. Further review and investigation of the company’s books revealed the following omissions and errors which were
not corrected during the year of errors:

2019 2020 2021 2022

Deferred expense 14,400 11,200 8,000 9,600
Deferred income 6,400 4,800
Accrued expense 3,200 1,200 1,600 800
Accrued income 2,000 2,400
Ending inventory – overstated 112,000 128,000
Ending inventory – understated 96,000 144,000
b. A P50,000 routinary repair cost incurred on its equipment at the beginning of 2019 was charged to the equipment
account and was depreciated using straight-line method over the remaining useful life of the equipment which was 5
years
c. A P90,000 major repair cost which enhanced the production capacity of one of its equipment at the beginning of
2021 was charged to repairs expense. Remaining useful life of the related production equipment was 3 years.
No dividends were declared during the year 2019 to 2022 and no adjustments were made to retained earnings. The
company’s reported the following net income:
Year 2019 2020 2021 2022
Net income 120,000 88,000 104,000 120,000
Questions:
7) What is the correct net income (loss) in 2019?
A. 35,200 C. 187,200
B.198,400 D. 227,200
8) What is the correct net income (loss) in 2020?
A.290,400 C. (115,600)
B.( 29,600) D. (125,600)
9) What is the correct net income (loss) in 2021?
A. 88,800 C. 89,600
B.158,800 D. 120,800
10) What is the correct net income (loss) in 2022?
A.372,200 C. 390,400
B.392,000 D. (152,000)
11) What is the net adjustment to retained earnings as of January 1, 2022?
A. 81,600 debit C. 121,600 debit
B.120,000 credit D. 121,600 credit
12) What is the net adjustment to working capital as of December 31, 2022?
A.144,000 C. 154,500
B.150,400 D. 163,200
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