Unit 4 – Accounting for Correction of Errors

CABUEÑAS, BRENTON C. BSA – 3 AUDCAP2

Problem 1
Answers:

1.C 2.A 3.D 4.B 5.D 6.A 7.B 8.D 9.D 10.D
11.D 12.C 13.C 14.A 15.D 16.B 17.C 18.B 19.A 20.C
21.B 22.B 23.C 24.A 25.B 26.C 27.B 28.C 29.B 30.D
31.D 32.B 33.B 34.D 35.C 36.D

Accumulated depreciation 51,000

Depreciation expense (2006) 17,000
Retained earnings (2004 & 2005) 34,000
Retained earnings 90,000
Salaries expense 90,000
No adjustment
No adjustment since no indication of impairment.
Loss on obsolete inventory 174,000
Retained earnings 174,000
Salaries expense 6,800
Salaries payable 6,800
Prepaid insurance 4,400
Insurance expense 4,400

2004 2005 2006

Item A 17,000 17,000 17,000
Item B (90,000) 90,000
Item C - - -
Item D
Item E (174,000)
Item F (6,800)
Item G _______ _______ 4,400
Net Effect 17,000 73,000 (69,400)

1.B 2.A 3.D 4.D

Problem 2
 Answers:
2004 2005 2006
Unadjusted Net income/Loss 18,000 (11,200) (12,400)
Item B (1,200) (1,200) (1,200)
Item C 3,000 (3,000)
4,300 (4,300)
Item D – unrecorded ending inv. 3,800 (3,800)
5,500
- unrecorded purchases (3,800) 3,800
(5,500)
Item E (2,100) 2,100
(1,700)
Item F 1,200 (1,200)
_______ _______ _2,500_
Adjusted net income/loss (12,000) 19,800 (12,000) (16,200)
Retained earnings – beg. 81,000 94,600 67,600
Item A (15,000) (15,000)
Item B – error in recording improv. 9,600
- unrecorded depreciation _ (800) _ __________ _________
Retained earnings - end 94,600 67,600 51,400

1.A 2.C 3.A 4.C 5.C

6.A

Problem 3
Answers:
Supplies expense 8,000
Supplies on hand 8,000
Accrued salaries and wages 7,500
Salaries and wages expense 7,500
Salaries and wages expense 22,000
Accrued salaries and wages 22,000
Interest income 25,500
Interest receivable 25,500
Interest receivable 21,750
Interest income 21,750
Insurance expense 125,000
Prepaid insurance 125,000
Retained earnings 70,000
Rent income 70,000
Depreciation expense 225,000
Accumulated depreciation 225,000
Retained earnings 36,000
Accumulated depreciation 36,000

1.B 2.C 3.B 4.C 5.A

Problem 4
Answers:
 Retained earnings 114,600
Sales 114,600
Cost of sales (beg. inv) 25,920
Retained earnings 25,920
Retained earnings 1,450
Interest expense 1,552
Discount on bonds payable 3,002

Int. paid Int. exp. Amortization Carrying

Value
235,000
2002 15,000 16,450 1,450 235,000
2003 15,000 16,552 1,552 235,000

Retained earnings 25,500

Repairs expense 30,000
Equipment 55,500
Accumulated depreciation 5,100
Retained earnings 2,550
Depreciation expense 2,550
Accumulated depreciation 3,000
Depreciation expense 3,000

2002 2003
Unadjusted net income 303,000 232,200
Item 1 (114,600) 114,600
Item 2 25,920 (25,920)
Item 3 (1,450) (1,552)
Item 4 (25,500) (30,000)
- error in recording dep. 2,550 2,550
_____ 3,000
Adjusted net income 189,920 294,878

1.D 2.A 3.C 4.A 5.C

Problem 5
Answers:
Depreciation expense 16,000
Accumulated depreciation 16,000
Cost of sales (beg. inv) 95,000
Retained earnings 95,000
Cost of sales 42,500
Inventory 42,500
Cash 28,000
Accounts receivable 28,000
Accumulated depreciation 110,000
Machinery 91,500
Gain on sale 18,500
Loss on damages 625,000
Estimated liability on damages 625,000
Unrealized holding loss 26,000
Valuation allowance 26,000
Salaries payable 48,000
Salaries expense 48,000
To reverse accrued salaries.
Salaries expense 36,600
Salaries payable 36,600
Equipment 1,600,000
Repairs expense 1,600,000
Depreciation expense 200,000
Accumulated depreciation 200,000
Insurance expense 25,000
Prepaid insurance 37,500
Retained earnings 62,500

1.C 2.B 3.B 4.D 5.B

6.A 7.A 8.D

Problem 6
Answers:
Marketable equity securities 30,000
Gain on sale 30,000
Loss on market decline 13,000
Allowance for market decline 13,000
Cost of sales 66,000
Inventory 66,000
Equipment 48,000
Retained earnings 48,000
Depreciation 8,000
Accumulated depreciation 8,000
Loss on damages 60,000
Estimated liability 60,000

1.A 2.D 3.A 4.A 5.C

Problem 7
Answers:
2004 2005 2006
Unadjusted net income 63,000 70,763 61,880
Item A (15,120) 15,120
(14,658) 14,658
(32,368)
Item B 1,400 (1,400)
Item C 6,314 (6,314)
8,470 (8,470) 9,842
Item D (4,270) 4,270
Item E 18,270 (18,270) 21,640
Item F - - -
Item G 3,500
Item H (3,500) (4,900) (5,600)
Adjusted net income P52,094 P81,081 P 51,082

1.C 2.B 3.C 4.C 5.B

Problem 8
Answers:
No adjustment since the 2004 financial statement was not affected.
Equipment 30,000
Retained earnings 30,000
Retained earnings 3,000
Depreciation expense 3,000
Accumulated depreciation 6,000
No adjustment since the 2004 financial statement was not affected.
Allowance for bad debts 9,000
Accounts receivable 9,000
Retained earnings 6,000
Allowance for market decline 6,000
Accumulated depreciation 3,000
Retained earnings 3,000
Land 9,000
Retained earnings 9,000
Retained earnings 14,300
Cost of sales 14,300
Retained earnings 5,000
Accumulated depreciation 5,000
Machinery 12,000
Accounts payable – others 12,000
Taxes 5,900
Accrued taxes 5,900

2004 2005 2006

Unadjusted net income 100,000 110,000
Item 1 (20,000) 20,000
Item 2 30,000 (3,000) (3,000)
Item 3 (3,000) 3,000
(4,100) 4,100
Item 4 - - -
Item 5 (6,000)
Item 6 3,000
Item 7 9,000
Item 8 (14,300) 14,300
Item 9 (5,000)
Item 10 _________ _________ (5,900)
Adjusted net income 110,800 115,400
Retained earnings - beg 90,000 203,700
Adjustments:
Item 1 (20,000)
Item 2 30,000
Item 3 (3,000)
(4,100) _________
Retained earnings - end 203,700 319,100
1.B 2.C 3.C 4.B 5.C
6.D 7.A 8.D

Problem 9
 Answers:
2005 2006
Unadjusted net income 123,250 156,250
12,500
5,000 (5,000)
15,000
(25,000) 25,000
(9,000)
(20,000) 20,000
(15,000)
Adjusted net income 83,250 199,750

1.C 2.C

Problem 10
Answers:
1. A - P415,000 given in item no. 1
2. C - P394,250 (P415,000 – P20,750 item no. 2)
3. A - P1,274,000 given in item no.
4. C - P152,250 x 4/12 = P50,750
5. C
6. A - P533,750 given in item no. 3
7. B - P69,750 given in item no.7
8. A
Salaries – P40,000 x 12 P 480,000
Living allowance 227,500
Total 707,500
9. B
Capital – beg. 2,180,500
Omission of prepaid expense in 2001 45,500
Omission of accrued expenses in 2001 ( 45,000)
Total 2,181,000
10. B
- Sales – cash basis 11,427,500
+ AR – end 415,000
- AR – beg 283,500
Sales – accrual basis - 11,559,000
11. B
Purchases – cash basis 5,339,250
+ AP – end 533,750
- AP – beg 297,500
Purchases – accrual basis 5,575,500
 12. D
Salaries per record 3,045,000
- Salaries of the proprietor 480,000
Adjusted Salaries 2,565,000
13. B
Taxes and licenses – cash basis 217,000
+ Accrued taxes – end 33,750
- Accrued taxes – beg 20,250
Taxes and licenses – accrual basis 230,500
14. B
Insurance expense – cash basis 152,250
+ Prepaid insurance – beg 45,500
- Prepaid insurance – end 50,750
Insurance expense – accrual basis 147,000
15. B
Utilities – cash basis 220,500
+ Accrued utilities – end 36,000
- Accrued utilities – beg 24,750
Utilities – accrual basis 231,750
16. A - given in item # 2
17. B
18. A
Beginning inventory 1,085,000
Purchases 5,575,500
Ending inventory (1,274,000)
Cost of Sales 5,386,500
19. C

Problem 11
Answers:
Doubtful Account Expense 14,500.00
 Allowance for D/A 14,500.00
Required allowance as of 12.31.2006
-on past due accounts (5% x P30,000.00) P 1,500.00
-on current accounts (1% x P400,000.00) 4,000.00
Total P 5,500.00
Unadjusted debit balance of Allowance for D/A 9,000.00
Additional Provision (expense) P14,500.00

a. Merchandise Inventory, 01.01.2006 7,000.00

Retained Earnings 7,000.00
(To correct understatement of inventory at end of 2005)
b. Cost of Sales 3,000.00
Merchandise Inventory, 12.31.2006 3,000.00
(To correct overstatement ending inventory for 2006)
a. Machinery 14,500.00
Repairs and Maintenance 14,500.00
(To reclassify delivery and installation costs)
b. Depreciation Expense 1,450.00
Accumulated Depreciation 1,450.00
(To provide for depreciation for items not capitalized)
Miscellaneous Income 2,000.00
Gain on Sale of Treasury Stoc 5,000.00
Land 2,000.00
APIC-T/S 5,000.00
(to correct client’s entry on the purchase of land)
Prepaid Pension Cost 480,000.00
Pension Expense 480,000.00
(To correct client’s entry in the treatment of
prepaid pension cost)
Current Service and interest cost P
620,000.00 Expected return on Plan
Asset
(P 1,000,000.00 x 10%) (100,000.00)
Pension Expense P 520,000.00
Reported pension expense 1,000,000.00
Prepaid Pension Cost P 480,000.00

1.C 2.A 3.C 4.A 5.A

6.D 7.D 8.B 9.D 10.D

Problem 12
Answers:
2004 2005 2006
A 9,000
(1,800) (1,800) (1,800)
B
C 112,000 (112,000)
D
E (120,000) 120,000
(120,000
F ______ ______ (72,000)
7,200 134,200 185,800

1.D 2.B 3.B 4.C

Problem 13
Answers:

Sales 5,590
Accounts receivable 5,590
Inventory 4,300
Cost of sales 4,300
Sales 6,100
Retained earnings - beg 6,100
Warranty expense 12,417
Estimated warranty payable 12,417
2004 940,000 – 7,800 932,200
2005 1,010,000 + 6,100 – 7,800 1,023,900
2006 1,795,000 – 5,590 – 6,100 1,783,310
Adjusted balance 3,739,410
X ½ of 1% _____.005
Total Warranty expense 18,697
Less: Warranty paid 6,280
Estimated warranty liability 12,417

Fund reserve from the bank 14,000 14,000

Other income
600,000 600,000
OE: Delivery equipment
Notes payable
409,808
OE: Delivery equipment
190,192 600,000
Discount on NP
Notes payable
190,192 190,192
Adj: Discount on NP
Delivery equipment 40,981 40,981
Adj: Interest expense
Discount on NP 18,000 18,000
Retained earnings
Salaries 10,000 10,000
Salaries
 Accrued salaries

Problem 14
Answers:

NET INCOME
2005 2006
A. Omission of purchases (12,000) 12,000
Omission of inventory 12,000 (12,000)
B. Omission of purchases (18,000) 18,000
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G (2,400) 2,400
H (9,000) _______
(39,800) 28,800

OPERATING EXPENSES
2005 2006
A
B
C (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G
H (9,000) _______
(19,400) 8,400

1.B 2.C 3.D 4.D 5.A

Problem 15
Answers:
1. B - 60,000 x 15% = P 9,000.
 2. C - 60,000 x 15% x 2/12 = P 1,500
3. B - Given in item A
4. C -
Retained earnings 3,000
Wages expense 3,000
Wages expense 11,000
Wages payable 11,000
5. A -
Interest payable 1,500
Wages payable 11,000
Property taxes 9,000
Advertising 17,000
Total 38,500

Problem 16
Answers:
2003 2004 2005
Unadjusted Net Income 127,000 150,000 128,500
A 14,000 (14,000)
(23,000)
B 15,000
C 4,000 (4,000)
5,000 (5,000)
3,500
D (10,000) 10,000
(14,000) 14,000
E 13,000
F 5,000 (2,000)
G 14,000
________ ________ (1,400)
Adjusted Net Income 121,000 179,000 129,600

1.B 2.A 3.D 4.A 5.B