CHAPTER 2 

– Accounting for
 Correction of Errors
Exercises

1. On November 1, 2006, Rosete Company

Company paid
paid P10,800 to renew its insurance
insurance policy
policy or !
years. On "ecember !1, 2006,
2006, Rosete#s
Rosete#s unad$usted trial
trial valance s%owed
s%owed a balance
balance o 
P2&0 or prepaid insurance
insurance and P1!,2!0
P1!,2!0 or insurance
insurance e'pense. (%at amounts s%oulds%ould
be reported or prepaid insurance
insurance and insurance e'pense in Rosete#s "ecember !1, 2006
inancial statements)
Prepaid Insurance Insurance Expense
a. P *,*00 P !,600
b. P 10,200 P !,600
c. P 10,200 P !,!00
d. P 10,200 P !,0!0

2. +n analysis
analysis o Palmes Corpora
Corporation#
tion#s
s unad$usted
unad$usted prepaid
prepaid e'pense account
account at "ecember
"ecember
!1, 2006 revealed t%e ollowin-

• +n openin balance
balance at P6,000 or Palmes
Palmes compre%ensive
compre%ensive insurance
insurance policy. Palmes
%ad paid an annual premium o P12,000 on uly 1, 200/.
• + P12,800 annual insurance premium payment made uly 1, 2006.
• + P8,0
P8,000
00 adva
advanc
nce
e rent
rental
al paym
paymen
entt or
or a ware
ware%o
%ous
use
e Palm
Palmes
es leas
leased
ed or
or 1 year
year
beinnin anuary 1, 2006.

n its "ecember !1, 2006 balance s%eet, w%at amount s%ould Palmes report as prepaid
e'penses)
a. P 20,00 b. P 1,00 c. P 8,000 d. P 6,00

!. On October
October 1, 2006,
2006, a compan
company y sold service
services
s to a custome
customerr and accepte
acceptedd a note
note in
e'c%ane
e'c%ane wit% a P120,000
P120,000 ace value
value and an interest
interest rate o 10. 3%e note re4uires
re4uires
t%at bot% t%e principal and interest be paid at t%e maturity date, "ecember 1, 200&.
3%e company#s
company#s accountin period is t%e calendar year
year.. (%at ad$ustin entry 5related to
t%is note will be re4uired at "ecember !1, 2006 on t%e company#s boo7s)

a. "eerred interest in
income !,000
nterest receivable !,000
b. nterest income !,000
nterest receivable !,000
c. nterest receivable !,000
"eerred interest income !,000
d. nterest receivable !,000
nterest income !,000

. (%at is t%e
t%e purpose
purpose o t%e
t%e ollowin
ollowin
 entry)
entry)

upplies ''''
upplies e'pense ''''

a. 3o reconi9e supplies
supplies used, i purc%ases o supplies are recorded
recorded in supplies.
supplies.

1
 b. 3o reconi
reconi9e
9e supplies
supplies on %and,
%and, i purc%a
purc%ases
ses o suppl
supplies
ies are recorded
recorded in suppli
supplies
es
e'pense.
c. 3o record
record t%e purc%a
purc%ase
se o supplies
supplies durin
durin or at t%e
t%e end o t%e period.
period.
d. 3o close
close t%e e'pense
e'pense accou
account
nt or supplie
supplies
s at t%e end o t%e
t%e period.
period.

/. On "ecember
"ecember !1,
!1, earned
earned but unpaid
unpaid waes
waes amoun
amounted
ted to P1/,000
P1/,000.. (%at rever
reversin
sin entry
entry
could be made on anuary 1)
a. (aes e'pense 1/,000
(aes payable 1/,000
b. Prepaid e'pense 1/,000
(aes e'pense 1/,000
c. (aes e'pense 1/,000
Prepaid waes 1/,000
d. (aes payable 1/,000
(aes e'pense 1/,000

6. + !:year
!:year insurance
insurance policy was
was purc%ased
purc%ased on October1
October1 or P6,000, and
and prepaid insurance
insurance
was debited.
debited. +ssumin
+ssumin a "ecember
"ecember !1 year:end,
year:end, w%at is t%e reversin
reversin entry
entry at t%e
beinnin o t%e ne't period)
a. None
None isis re4u
re4uir
ired
ed..
b. Cas% 6,000
Prepaid insurance 6,000
c. Pr
Prepaid insurance /,/00
nsurance e'pense /,/00
d. nsurance e'pense /00
Prepaid insurance /00

&. + consultin
consultin irm started
started and complet
completed
ed a pro$ect
pro$ect or
or a client
client in "ecem
"ecember
ber 2006.
2006. 3%e
pro$ect %as not been recorded on t%e consultin irm#s boo7s, and t%e irm will not
receive payment
payment rom t%e client until ;ebruary
;ebruary 200&. 3%e ad$ustin entry t%at
t%at s%ould be
made on t%e boo7s o t%e consultin irm on "ecember !1, 2006, t%e last day o t%e
irm#s iscal year, is
a. Cas% in transit '''
Consultin revenue '''
b. Consultin revenue receivable '''
Consultin revenue '''
c. <nearned consultin rev. '''
Consultin revenue '''
d. Consultin revenue receivable '''
<nearned co consultin re
revenue '''

8. Cristi
Cristie
e Compa
Company
ny sublet
sublet a portio
portion
n o its ware%
ware%ous
ouse
e or / years
years at an annual
annual rental
rental o 
P1/,000, beinnin on =arc% 1. 3%e tenant paid 1 year#s
year#s rent in advance,
advance, w%ic% Cristie
recorded as a credit
credit to calendar:year
calendar:year basis. 3%e ad$ustment on "ecember
"ecember !1 o t%e irst
year s%ould be
a. No >ntry.
b. <nearned rental income 2,/00
Rental income 2,/00
c. Rental income 2,/00
<nearned rental income 2,/00
d. <nearned rental income 12,/00
Rental income 12,/00

2
*. +ter
+ter a succes
successu
sull drive
drive aimed at member
memberss o a speci
speciic
ic natio
national
nal associa
associatio
tion,
n, Online
Online
Company received a total o P180,000 or !:year subscriptions beinnin +pril 1, 2006,
and recorded t%is amount
amount in t%e unearned
unearned revenue account.
account. +ssumin Online recordsrecords
ad$ustment only at t%e end o t%e calendar year, t%e ad$ustin entry re4uired to relect
t%e proper balances in t%e accounts at "ecember !1, 2006 is to
a. "ebit subscri
subscription
ption revenue
revenue or P1!/,000
P1!/,000 and credit
credit unearned
unearned revenue
revenue or P1!/,000.
P1!/,000.
b. "ebit unearn
unearneded revenue
revenue or
or P1!/,000
P1!/,000 and
and credit
credit subscri
subscription
ption reven
revenue
ue or P1!/,00
P1!/,000.0.
c. "ebit subscri
subscription
ption revenue
revenue or P/,000
P/,000 and
and credit unearne
unearned d revenue
revenue or P/,000.
P/,000.
d. "ebit unearned
unearned revenue
revenue or P/,000
P/,000 and credit
credit subscriptio
subscription n revenue
revenue or P/,000.

10. ay Corporatio

Corporationn renewed
renewed an insurance
insurance policy or !:years
!:years beinnin
beinnin uly 1, 2006 and
record
recorded
ed t%e P81,000
P81,000 premium
premium in t%e prepaid
prepaid insura
insurance
nce account
accounts.
s. 3%e P81,000
P81,000
premium represents an increase o P2!,00 rom t%e P/&,600 premium c%ared ! years
ao. +ssumin ay?#
ay?# records its insurance
insurance ad$ustments
ad$ustments only at t%et%e end o t%e calendar
calendar
year
year, t%e ad$ust
ad$ustin
in entry
entry re4uir
re4uired
ed to relec
relectt t%e proper
proper balan
balances
ces in t%e insur
insuran
ance
ce
accounts at "ecember !1, 2006, ay#s year:end
year:end is to
a. "ebit insura
insurance
nce e'pense
e'pense or P1!,/00
P1!,/00 and credit
credit prepaid
prepaid insuranc
insurancee or P1!,/00.
P1!,/00.
b. "ebit prepaid
prepaid insuran
insurance
ce or P1!,/00
P1!,/00 and credit insura
insurance
nce e'pense
e'pense or P1!,/00.
P1!,/00.
c. "ebit insur
insuranc
ancee e'pense
e'pense or
or P6&,/00
P6&,/00 and
and credit
credit prepaid
prepaid insura
insurance
nce or
or P6&,/00.
P6&,/00.
d. "ebit insura
insurance
nce e'pense
e'pense or P2!,100
P2!,100 and credit prepaid
prepaid insuran
insurance
ce or P2!,100.
P2!,100.

11. 3%e 2006 inancia

inanciall statement
statements
s o @ers%ey
@ers%ey Company
Company reported
reported net income
income or t%e year
year
ended "ecember !1, 2006 o 2 million. On uly 1, 200&, subse4uent to t%e issuance o 
t%e 2006 inancial statements, @ers%ey c%aned rom an accountin principle t%at is not
ene
enera
rall
lly
y acce
accept
pted
ed to oneone t%at
t%at is ene
enera
rall
lly
y acce
acceptpted
ed..  t%e
t%e ene
enera
rall
lly
y acce
accept
pted
ed
accountin principle %ad been used in 2006, net income or t%e year ended "ecember
!1, 2006
2006 woul
would
d %ave
%ave been
been decr
decrea
ease
sed
d by 1 mill
millio
ion.
n. On +u +uu
ust
st 1, 200&
200&,, @ers
@ers%e
%ey
y
discovered a mat%ematical error relatin to its 2006 inancial statements.  t%is error
%ad been discovered in 2006, net income or t%e year ended would %ave been increased
by P/00,000.

(%at amount, i any, s%ould be included in net income or t%e year ended "ecember !1,
200& because o t%e items noted above)
a. P 0 c. P /00,000 increase
b. P /00,000 decrease d. P 1,000,000 decrease

12. >dcelle
>dcelle Company
Company reported
reported a retained earnins
earnins balance o P00,000
P00,000 at "ecember
"ecember !1,
200/. n +uust 2006, >dcelle determined t%at insurance premiums o P60,000 or t%e
!:year period beinnin anuary 1, 200/ %ad been paid and ully e'pensed in 200/.
>dcelle %as a !0 income ta' rate.

(%at amount s%ould >dcelle report as ad$usted beinnin retained earnins in its 2006
statement o retained earnins)
a. P 2,000 b. P 0,000 c. P 28,000 d. P 20,000

1!. Colasissi
Colasissi Corporatio
Corporation n ailed
ailed to accrue warranty
warranty costs o P/0,000 in its "ecember !1,
200/
200/ inanc
inancial
ial statem
statement
ents.
s. n additi
addition,
on, a c%ane
c%ane rom
rom strai
strai%t
%t:li
:line
ne to accel
accelera
erated
ted
depreciation made at t%e beinnin o 2006 resulted in a cumulative eect o P!0,000
on Colasi
Colasiss
ssi#s
i#s retained
retained earnin
earnins.
s. Aot
Aot%
% t%e P/0,00
P/0,0000 and P!0,00
P!0,000 0 are
are net o relate
related
d
income ta'es.

(%at amount s%ould Colasissi report as prior period ad$ustments in 2006)

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 a. P 0 b. P !0,000 c. P /0,000 d. P 80,000
Buestions 1 and 1/ are based on t%e ollowin inormation.

On October 1, 2006, uri Retailers sined a :mont%, 16 note payable to inance t%e
purc%ase o %oliday merc%andise. +t t%at date, t%ere was no direct met%od o pricin t%e
merc%andise, and t%e note#s mar7et rate o interest was 11. uri recorded t%e
purc%ase at t%e note#s ace amount. +ll o t%e merc%andise was sold by "ecember 1,
2006. uri#s 2006 inancial statements reported interest payable and interest e'pense
on t%e note or ! mont%s at 16. +ll amounts due on t%e note were paid ;ebruary 1,
200&.

1. uri#s 2006 cost o oods sold or t%e %oliday merc%andise was
a. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October
1, 2006 present value.
b. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October
1, 2006 present value plus 11 interest or 2 mont%s.
c. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s
October 1, 2006 present value.
d. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s
October 1, 2006 present value plus 11 interest or 2 mont%s.

1/. +s a result o uri#s accountin treatment o t%e note, interest, and merc%andise, w%ic%
o t%e ollowin items was reported correctly)

12/31/06 12/31/06
Retained earnings Interest payable
a. es es
b. No No
c. es No
d. No es

16. On "ecember !1, 2006, >'cel Corp. sold merc%andise or P&/,000 to ;ineale Co. 3%e
terms o t%e sale were net !0, ;OA s%ippin point. 3%e merc%andise was s%ipped on
"ecember !1, 2006 and arrived at ;ineale on anuary /, 200&. Aecause o a clerical
error, t%e sale was not recorded until anuary 200&, and t%e merc%andise, sold at 2/
mar7up, was included in >'cel#s inventory at "ecember !1, 2006.

+s a result, >'cel#s cost o oods sold or t%e year ended "ecember !1, 2006 was
a. <nderstated by P &/,000 c. <nderstated by P 1/,000
b. <nderstated by P 60,000 d. Correctly stated

1&.;or t%e past ! years, Dreenwis% Co. %as ailed to accrue unpaid waes earned by
wor7ers durin t%e last wee7 o t%e year. 3%e amounts omitted, w%ic% are considered
material, were as ollows-

"ecember !1, 200! P/6,000

"ecember !1, 200/ /1,000
"ecember !1, 2006 6,000

3%e entry on "ecember !1, 2006 to correct or t%ese omissions would include a
a. Credit to wae e'pense or P6,000
b. "ebit to wae e'pense or P/1,000
c. "ebit to wae e'pense or P1!,000

4
 d. Credit to retained earnins or P6,000
18. +n audit o ;unny Co. or 2006, its irst year o operations, detected t%e ollowin errors
made at "ecember !1, 2006-

;ailed to accrue P/0,000 interest e'pense

;ailed to record depreciation e'pense on oice e4uipment o P80,000
;ailed to amorti9e prepaid rent e'pense o P100,000
;ailed to delay reconition o prepaid advertisin e'pense o P60,000

3%e net eect o t%ese errors was to overstate net income or 2006 by
a. P 1!0,000 b. P 1&0,000 c. P 2!0,000 d. P 2*0,000

1*. (%ile preparin its 2006 inancial statements, ;alact Corp. discovered computational
errors in its 200/ and 200 depreciation e'pense. 3%ese errors resulted in
overstatement o eac% year#s income by P2/,000, net o income ta'es. 3%e ollowin
amounts were reported in t%e previously issued inancial statements-
2005 2004
Retained earnins, 1E1 P &00,000 P /00,000
Net income 1/0,000 200,000
Retained earnins, 12E!1 P 8/0,000 P &00,000

;alact#s 2006 net income is correctly reported at P180,000. (%ic% o t%e ollowin
amounts s%ould be reported as prior:period ad$ustments and net income in ;alact#s
2006 and 200/ comparative inancial statements)

Year Prior period adust!ent "et inco!e

a. 200/ : P1/0,000
2006 P 5/0,000 180,000
b. 200/ 5/0,000 1/0,000
2006 : 180,000
c. 200/ 52/,000 12/,000
2006 : 180,000
d. 200/ : 12/,000
2006 : 180,000

20. 3%e ollowin inormation appeared on Ali%t nc.#s "ecember !1 inancial statements-
2005 2006
+ssets P 1,000,000 P1,200,000
Fiabilities &/0,000 800,000
Contributed capital 120,000 120,000
"ividends paid 100,000 60,000

n preparin its 2006 inancial statements, Ali%t discovered t%at it %ad misplaced a
decimal in calculatin depreciation or 200/. 3%is error overstated 200/ depreciation by
P10,000. n addition, c%anin tec%noloy %ad siniicantly s%ortened t%e useul lie o 
Ali%t#s computers. Aased on t%is inormation, Ali%t determined t%at depreciation
s%ould be P!0,000 %i%er in 2006 inancial statements.

+ssumin t%at no correctin or ad$ustin entries %ave been made and inorin income
ta'es, %ow muc% s%ould Ali%t report as 2006 net income)
a. P 2!0,000 b. P 210,000 c. P 180,000 d. P 1&0,000

5
Buestions 21 and 22 are based on t%e ollowin inormation.

+n audit o +nelina Company %as revealed t%e ollowin our errors t%at %ave occurred
but %ave not been corrected-

• nventory at "ecember !1, 200/:P0,000, understated

• nventory at "ecember !1, 2006:P1/,000, overstated
• "epreciation or 200/:P&,000, understated
• +ccrued e'penses at "ecember !1, 2006:P10,000, understated

21. 3%e errors cause t%e reported net income or t%e year endin "ecember !1, 2006 to be
a. Overstated by P&2,000 c. <nderstated by P28,000
b. Overstated by P6/,000 d. <nderstated by P/,000

22. 3%e errors cause t%e reported retained earnins at "ecember !1, 2006 to be
a. Overstated by P6/,000 c. Overstated by P2/,000
b. Overstated by P!2,000 d. <nderstated by P18,000

2!. Collection o notes receivable o P/0,000 plus interest o P/00 was recorded as debit to
cas% o P/0,/00 and notes receivable o P/0,/00. 3%is error will
a. Overstate t%e e'penses by P/00
b. <nderstate t%e liability by P/00
c. <nderstate assets by P/00 and understate revenue by P/00
d. <nderstate revenue by P/00

2. +ccounts payable o P!2,000 was paid and erroneously recorded as debit to accounts
payable and credit to cas% or P2!,000. 3%e wor7in capital
a. @as no eect c. s understated by P*,000
b. s overstated by P*,000 d. s understated by P2!,000

2/. 3%e beinnin accumulated depreciation per record was P100,000. "urin t%e year, t%e
irm sold one o its mac%ines recorded as ollows-
Cas% 2&0,000
+ccumulated depreciation : mac%ine !0,000
=ac%ine !00,000

 t%e actual cas% proceeds is P!00,000, t%e correctin entry would be-
a. Cas% !00,000
  =ac%ine !00,000
b. Cas% !0,000
  Dain on sale o mac%ine !0,000
c. +ccumulated depreciation : mac%ine !0,000
Dain on sale o mac%ine !0,000
d. Cas% !00,000
  =ac%ine 2&0,000
Dain on sale o mac%ine !0,000

26. Aased on no. 2/, assume t%at t%e nominal accounts %ad been closed. 3%e eect o t%e
error to t%e accountin elements, i not corrected, is
a. P!0,000 understatement o t%e net income.
b. P!0,000 understatement o asset and P!0,000 understatement o net income.
c. P!0,000 understatement o asset and P!0,000 understatement o owner#s e4uity.

6
 d. P!0,000 understatement o asset and P!0,000 overstatement o owner#s e4uity.
2&. + cas% purc%ase o P/,200 was recorded as P2,/00. 3%e error %ad been discovered w%en
nominal accounts were already closed to income summary, but not yet closed to t%e
capital account. 3%e correctin entry will re4uire a
a. P2,&00 debit to accounts receivable
b. P2,&00 debit to purc%ases
c. P2,&00 credit to purc%ases
d. P2,&00 credit to accounts payable

28. <nder t%e periodic inventory system, t%e endin inventory o P6/,000 was erroneously
recorded as P/6,000. 3%e error %ad been discovered w%en all nominal and temporary
accounts were already closed to t%e real account. 3%e correctin entry would re4uire a
a. "ebit to capital account c. Credit to cost o sale
b. "ebit to income summary account d. Credit to owner#s capital

2*.+ sales discount o P/,000 was recorded as purc%ase discount. 3%e error %ad been
discovered w%en nominal accounts were still open. 3%e correctin entry would re4uire a
a. P/,000 debit to purc%ase discount c. P/,000 credit to sales discount
b. P/,000 credit to purc%ase discount d. P/,000 credit to accounts payable

!0. +n owner#s wit%drawal amountin to P20,000 was erroneously recorded as salaries

e'pense. 3%e error %ad been discovered w%en all temporary accounts were already
closed to t%e capital account. 3%e correctin entry will re4uire a
a. P20,000 debit to owner#s capital c. P20,000 debit to salaries e'pense
b. P20,000 debit to owner#s drawins d. No correctin entry is necessary

!1. + payment o P20,000 rent was recorded as a debit to rent income. 3%e error %ad been
discovered w%en nominal accounts were already closed. 3%e correctin entry would
re4uire a
a. P20,000 debit to rent e'pense c. P0,000 credit to rent income
b. P20,000 debit to rent income d. No ad$ustment entry is necessary

!2.+ cas% collection o P/,000 rom customer#s open account was recorded as P/00. 3%e
error %ad been discovered w%en nominal accounts were still open. 3%e correctin entry
would re4uire a
a. P,/00 debit to accounts receivable c. P/00 credit to accounts
receivable
b. P,/00 debit to cas% d. P/00 credit to cas%

!!. + sale o merc%andise on account o P!,200 was recorded as P2,!00. 3%e error %ad
been discovered w%en nominal accounts were already closed. 3%e correctin would
re4uire a
a. P*00 debit to cas%. c. P*00 debit to sale
b. P*00 debit to accounts receivable d. P*00 credit to accounts receivable

!. + collection o P/,000 notes receivable, plus P/00 interest income was recorded as debit
to cas% P/,/00 and credit to notes receivable P/,/00. 3%e error %ad been discovered
w%en nominal accounts were still open. 3%e correctin entry would re4uire a
a. P/00 debit to cas%. c. P/00 credit to cas%
b. P/00 debit to accounts receivable d. P/00 credit to interest income

7
!/.3%e accrued interest on a 12, 60:day note o a customer dated "ecember 1, 2006 wit%
a ace value o P100,000 was not ta7en up as o "ecember !1, 200. 3%e collection o 
t%e note, w%ic% matured on anuary !1, 200&, was recorded as
Cas% 102,000
Notes receivable 100,000
nterest ncome 2,000

3%e error was discovered ater collection. 3%e correctin entry would re4uire a
a. P2,000 debit to cas%.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income

!6.+ return o merc%andise amountin to P,/00 w%ic% was previously purc%ased on

account was recorded as

+ccounts payable /,00

Purc%ases /,00

 t%e error %ad been discovered w%en t%e nominal accounts were still open, t%e
correctin entry would re4uire a
a. P*00 debit to purc%ase return
b. P*00 debit to accounts payable
c. P*00 credit to purc%ases
d. P*00 credit to accounts payable

 #ns$er%
1& c 2& a 3' d 4' b 5& d 6& a (& b )& d *& d 10& d  

11& d 12& c 13& c 14& a 15& d 16& b 1(& c 1)& b 1*& a 20& c  

21& b 22& b 23& c 24& a 25& b 26& c 2(& b 2)& c 2*& b 30& d  

31& d 32& b 33& b 34& d 35& c 36& d

8
Problem 1
3%e irst audit o t%e boo7s o Fu9on Company was made or t%e year ended "ecember !1,
2006. n e'aminin t%e boo7s, t%e auditor ound t%at certain items %ad been overloo7ed or
incorrectly %andled in t%e last ! years. 3%ese items are-

a. +t t%e beinnin o 200, t%e company purc%ased a mac%ine or P1,020,000 5salvae
value o P102,000 t%at %ad a useul lie o 6 years. 3%e boo77eeper used strai%t:line
depreciation, but ailed to deduct t%e salvae value in computin t%e depreciation base
or t%e ! years.

b. +t t%e end o 200/, t%e company ailed to accrue sales salaries o P*0,000.

c. + ta' lawsuit t%at involved t%e year 200 was settled late in 2006. t was determined
t%at t%e company owed an additional P1&0,000 in ta'es related to 200. 3%e company
did not record a liability in 200 or 200/ because t%e possibility o loss was considered
remote, and c%ared t%e P1&0,000 to a loss account in 2006.

d. Fu9on Company purc%ased anot%er company early in 200 and recorded oodwill o 
P*00,000. Fu9on %ad not amorti9ed oodwill because its value %ad not diminis%ed. 3%e
estimated economic lie o t%e oodwill is 20 years.

e. n 2006, t%e company wrote o P1&,000 o inventory considered to be obsoleteG t%is
loss was c%ared directly to Retained >arnins.

. ear:end waes payable o P6,800 were not recorded because t%e boo77eeper t%ou%
t%at Ht%ey were immaterial.I 

. nsurance or a 12:mont% period purc%ased on November 1 o t%is year was c%ared to
insurance e'pense in t%e amount o P/,280 because Ht%e amount o t%e c%ec7 is about
t%e same every year.

+uestions

1. 3%e entry to record t%e ad$ustment o item HaI is-

a. +ccumulated depreciation !,000
Retained earnins 1&,000
"epreciation e'pense 1&,000
b. +ccumulated depreciation /1,000
Retained earnins !,000
"epreciation e'pense 1&,000
c. +ccumulated depreciation 1&,000
"epreciation e'pense 1&,000
d. +ccumulated depreciation 1&,000
Retained earnins 1&,000

2. 3%e entry to record t%e ad$ustment o item HcI-

a. No ad$ustment.
b. Retained earnins 1&0,000
>stimated liability 1&0,000
c. Foss on damaes 1&0,000
>stimated liability 1&0,000

9
 d. Foss on damaes 1&0,000
Cas% 1&0,000
!. Net income o 200/ is overstated by-
a. P 60,00 b. P !18,00 c. P 10&,000 d. P &!,000

. Net income o 2006 is overstated by-

a. P !6&,000 b. P !12,000 c. P 10!,00 d. P 6*,00

Solution
a& #ccu!ulated depreciation 51'000
,epreciation expense -2006. 1('000
Retained earnings -2004  2005. 34'000
b& Retained earnings *0'000
alaries expense *0'000
c& "o adust!ent  
d& "o adust!ent since no indication o i!pair!ent&
e& oss on obsolete inentory 1(4'000
Retained earnings 1(4'000
& alaries expense 6')00
alaries payable 6')00
g& Prepaid insurance 4'400
Insurance expense 4'400

2004 2005 2006

Ite! # 1('000 1('000 1('000
Ite!  -*0'000. *0'000
Ite!    
Ite! ,
Ite! E -1(4'000.
Ite! 7 -6')00.
Ite! 8 99999999999 9999999999 4'400
"et Eect 1('000 -(3'000 -6*'400.

 #ns$er%
1&  2& # 3& , 4& ,

Problem 2
+ CP+ is enaed by t%e ony Corporation in 2006 to e'amine t%e boo7s and records and to
ma7e w%atever corrections are necessary. +n e'amination o t%e accounts discloses t%e
ollowin-

a. "ividends %ad been declared on "ecember 1/ in 200 and 200/ but %ad not been
entered in t%e boo7s until paid.

b. mprovements in buildin and e4uipment o P*,600 %ad been debited to e'pense at t%e
end o +pril 200!. mprovements are estimated to %ave an 8:year lie. 3%e company
uses t%e strai%t:line met%od in recordin depreciation and computes depreciation to t%e
nearest mont%.

c. 3%e p%ysical inventory o merc%andise %ad been understated by P!,000 at t%e end o 
200 and by P,!00 at t%e end o 200/.

d. 3%e merc%andise inventories at t%e end o 200/ and 2006 did not include merc%andise
t%at was t%en in transit and to w%ic% t%e company %ad title. 3%is s%ipments o P!,800
and P/,/00 were recorded as purc%ases in anuary o 2006 and 200, respectively.

e. 3%e company %ad ailed to record sales commissions payable o P2,100 and P1,&00 at
t%e end o 200/ and 2006, respectively.

10
. 3%e company %ad ailed to reconi9ed supplies on %and o P1,200 and P2,/00 at t%e end
o 200/ and 2006, respectively.

3%e Retained >arnins account s%owed t%e ollowin postins-

"ate tem "ebit Credit

200 an 1 Aalance 81,000
"ec !1 Net income or year 18,000
200/ an 10 "ividends paid 1/,000
=ar 6 toc7 sold J e'cess
over par !2,000
"ec!1 Net loss or year 11,200
2006 an 10 "ividend paid 1/,000
"ec !1 Net loss or year 12,00

+uestions%
1. Corrected net income o 200
a. P 1*,800 b. P 1/,600 c. P 1!,600 d. P 16,800

2. Corrected net loss o 200/

a. P 16,000 b. P 1,000 c. P 12,000 d. P 10,000

!. Corrected net loss o 2006

a. P 16,200 b. P 1/,800 c. P 1/,200 d. P 12,800

. +d$usted retained earnins at "ecember !1, 200

a. P 10*,200 b. P 106,00 c. P *,600 d. P 8/,000

/. +d$usted retained earnins at "ecember !1, 200/

a. P &1,200 b. P 6*,000 c. P 6&,600 d. P 6/,000

6. +d$usted retained earnins at "ecember !1, 2006

a. P /1,00 b. P *,800 c. P *,000 d. P 8,200

Solution
2004 2005 2006
:nadusted "et inco!e/oss 1)'000 -11'200. -12'400.
Ite!  -1'200. -1'200. -1'200.
Ite!  3'000 -3'000.
4'300 -4'300.
Ite! , ; unrecorded ending in& 3')00 -3')00.
5'500
 unrecorded purc<ases -3')00. 3')00
-5'500.
Ite! E -2'100. 2'100
-1'(00.
Ite! 7 1'200 -1'200.
 99999999999 9999999999 2'500
 #dusted net inco!e/loss 1*')00 -12'000. -16'200.
Retained earnings ; beg& )1'000 *4'600 6('600
Ite! # -15'000. -15'000.
Ite!  ; error in recording i!pro& *'600
 unrecorded depreciation -)00. 999999999 999999999999
Retained earnings  end *4'600 6('600 51'400
 #ns$er%
1& # 2&  3& # 4&  5&  6& #

11
Problem 3
+ partial trial balance o os% +le$andro Corporation is as ollows on "ecember !1, 2006-
"r.KKKK KKKKCr.KKKK
upplies on %and P 1!,/00
+ccrued salaries and waes P &,/00
nterest receivable on investments 2/,/00
Prepaid insurance /0,000
<nearned rent :0:
+ccrued interest payable &/,000

+dditional ad$ustin data-

a. + p%ysical count o supplies on %and on "ecember !1, 2006, totaled P/,/00.

b. 3%rou% oversi%t, t%e +ccrued alaries and (aes account was not c%aned durin
2006. +ccrued salaries and waes on 12E!1E06 amounted to P22,000.

c. 3%e interest receivable on investments account was also let unc%aned durin 2006.
+ccrued interest on investments amounts to P21,&/0 on 12E!1E06.

d. 3%e une'pired portions o t%e insurance policies totaled P!2/,000 as o "ecember

!1, 2006.

e. P10,000 was received on anuary 1, 200/, or t%e rent o a buildin or bot% 200/
and 2006. 3%e entire amount was credited to rental income.

. "epreciation or t%e year was erroneously recorded as P2/,000 rat%er t%an t%e
correct iure o P2/0,000.

. + urt%er review o depreciation calculations o prior year revealed t%at depreciation

o P!6,000 was not recorded. t was decided t%at t%is oversi%t s%ould be corrected by a
prior period ad$ustment.

+uestions
1. 3%e accrued salaries and waes at year:end is-
a. P 2*,/00 b. P22,000 c. P 1,/00 d. P &,/00

2. @ow muc% is t%e ad$usted salaries and waes at year:end assumin t%at t%e balance o 
t%is account in t%e boo7 is P!/0,000)
a. P !&*,/00 b. P !&2,000 c. P !6,/00 d. P !2,/00

!. Prepaid insurance at year:end is-

a. P /0,000 b. P !2/,000 c. P 12/,000 d. P 0
. upplies on %and at year:end is-
a. P 1!,/00 b. P 8,000 c. P /,/00 d. P 2,/00

/. "epreciation e'pense at year:end is-

a. <nderstated by P22/,000
b. Overstated by P22/,000
c. <nderstated by P261,000
d. Overstated by P261,000

12
Solution
1& upplies expense )'000
upplies on <and )'000
2& #ccrued salaries and $ages ('500
alaries and $ages expense ('500
=o reerse accrued salaries&
alaries and $ages expense 22'000
 #ccrued salaries and $ages 22'000
3& Interest inco!e 25'500
Interest receiable 25'500
=o reerse accrued inco!e&
Interest receiable 21'(50
Interest inco!e 21'(50
4& Insurance expense 125'000
Prepaid insurance 125'000
5& Retained earnings (0'000
Rent inco!e (0'000
6& ,epreciation expense 225'000
 #ccu!ulated depreciation 225'000
(& Retained earnings 36'000
 #ccu!ulated depreciation 36'000
 #ns$er%
1&  2&  3&  4&  5& #

Problem 4
3%e beore ta' income or ;ran9ine Dome9 Co. or 200/ was P!0!,000 and P2!2,200 or
2006. @owever, t%e accountant noted t%at t%e ollowin errors %ad been made-

1. ales or 200/ included amounts o P11,600 w%ic% was received in cas% durin 200/,
but or w%ic% t%e related products were delivered in 2006. 3itle did not pass to t%e
purc%aser until 2006.

2. 3%e inventory on "ecember !1, 200/, was understated by P2/,*20.

!. 3%e boo77eeper in recordin interest e'pense or bot% 200/ and 2006 on bonds payable
made t%e ollowin entry-

nterest e'pense 1/,000

Cas% 1/,000

3%e bonds %ave a ace value o P2/0,000 and pay a stated interest rate o 6. 3%ey
were issued at a discount o P1/,000 on anuary 1, 200/, to yield an eective interest o 
&. 5+ssume t%at t%e eective yield met%od s%ould be used.

. Ordinary repairs to e4uipment %ad been erroneously c%ared to t%e >4uipment account
durin 200/ and 2006 or P2/,/00 and P!0,000, respectively. 3%e company applies a
rate o 10 to t%e balance in t%e e4uipment account at t%e end o t%e year in its
determination o depreciation c%ares.

+uestions

1. 3%e ad$usted 200/ net income is-

a. P 22,120 b. P 1*,120 c. P 1*2,*20 d. P 18*,*20

2. 3%e ad$usted 2006 net income is-

13
 a. P 2*,8&8 b. P 2*1,8&8 c. P 180,2&8 d. P 6/,6&8

!. 200/ net income is overstated by-

a. P 2!2,200 b. P 22*,200 c. P 11!,080 d. P !,000

. 2006 net income is-

a. <nderstated by P62,6&8
b. <nderstated by P/*,6&8
c. Overstated by P166,/22
d. Overstated by P/1,*22

/. 3%e correctin entry in item H1I is-

a. +ccounts receivable 11,600
ales 11,600
b. ales 11,600
+ccounts receivable 11,600
c. Retained earnins 11,600
ales 11,600
d. ales 11,600
Retained earnins 11,600

Solution
1& Retained earnings 114'600
ales 114'600
2& ost o sales -beg& in. 25'*20
Retained earnings 25'*20
3& Retained earnings 1'450
Interest expense 1'552
,iscount on bonds payable 3'002
Int& paid Int& exp& #!ort& arrying
>alue
235'000
2002 15'000 16'450 1'450 236'450
2003 15'000 16'552 1'552 23)'002

4& Retained earnings 25'500

Repairs expense 30'000
E?uip!ent 55'500
 #ccu!ulated depreciation 5'100
Retained earnings 2'550
,epreciation expense 2'550
 #ccu!ulated depreciation 3'000
,epreciation expense 3'000

2002 2003
:nadusted net inco!e 303'000 232'200
Ite! 1 -114'600. 114'600
Ite! 2 25'*20 -25'*20.
Ite! 3 -1'450. -1'552.
Ite! 4 -25'500. -30'000
  error in recording depreciation 2'550 2'550
 9999999999 3'000
 #dusted net inco!e 1)*'*20 2*4')()
 #ns$er%
1& , 2& # 3&  4& # 5&   

14
Problem 5
ou %ave been assined to e'amine t%e inancial statements o =acelle Company or t%e
year ended "ecember !1, 2006. Aelow is t%e Aalance %eet o t%e company.

Current assets &00,000 Current liabilities 2/0,000

Non:current assets 2,000,000 Non:current liabilities*00,000
 KKKKKKKKK toc7%olders# >4uity 1,//0,000
3otal +ssets 2,&00,000 3otal liabilitiesE@> 2,&00,000

n t%e course o your audit, you discover t%e ollowin situations-

1. "epreciation o P16,000 or 2006 on delivery ve%icles was not recorded.

2. 3%e p%ysical inventory count on "ecember !1, 200/, improperly e'cluded merc%andise
costin P*/,000 t%at %ad been temporarily stored in a public ware%ouse. =acelle uses
periodic inventory system.

!. 3%e p%ysical inventory count on "ecember !1, 2006, improperly included merc%andise
wit% a cost o P2,/00 t%at %ad been recorded as a sale on "ecember 2&, 2006.

. + collection o P28,000 on account rom a customer received on "ecember !1, 2006

was not recorded until anuary 2, 200&.

/. n 2006, t%e company sold or P18,/00 ully depreciated e4uipment t%at oriinally cost
P110,000. 3%e company credited t%e proceeds rom t%e sale to t%e >4uipment account.

6. "urin November 2006, a competitor company iled a patent:inrinement suit aainst

=acelle claimin damaes o P1,100,000. 3%e company#s leal counsel %as indicated t%at
an unavorable verdict is probable and a reasonable estimate o t%e court#s award to t%e
competitor is P62/,000. 3%e company %as not relected or disclosed t%is situation in t%e
inancial statements.

&. =acelle %as a portolio o tradin securities. No entry %as been made to ad$ust to
mar7et. normation on cost and mar7et value is as ollows-

CO3 =+RL>3
"ecember !1, 200/ P 1*0,000 P 1*0,000
"ecember !1, 2006 168,000 16,000

8. +t "ecember !1, 2006, an analysis o payroll inormation s%ows accrued salaries o 
P!6,600. 3%e +ccrued alaries payable account %ad a balance o P8,000 at "ecember
!1, 2006, w%ic% was unc%aned rom its balance at "ecember !1, 200/.

*. + lare piece o e4uipment was purc%ased on anuary !, 2006, or P1,600,000 and was
c%ared to Repairs >'pense. 3%e e4uipment is estimated to %ave a service lie o 8 years
and no residual value. =acelle normally uses t%e strai%t J line depreciation met%od or
t%is type o e4uipment.

10. + P&/,000 insurance premium paid on uly 1, 200/, or a policy t%at e'pires on une !0,
200*, was c%ared to insurance e'pense.

15
11. + trademar7 was ac4uired at t%e beinnin o 200/ or P2/0,000. No amorti9ation %as
been recorded since its ac4uisition. 3rademar7 %as an economic lie o / years.
+uestions
1. Current assets at year:end is-
a. P &&6,000 b. P 6*/,000 c. P 6*1,000 d. P 6&8,/00

2. Non:current assets at year:end is-

a. P !,*8,/00 b. P !,02,/00 c. P !,!02,/00 d. P !,2*8,/00

!. Current liabilities at year:end is-

a. P *11,600 b. P 86!,600 c. P 286,600 d. P 2!8,600

. Non:current liabilities at year:end is-

a. P 1,/61,600 b. P 1,/2/,000 c. P 1,/1!,600 d. P *00,000

/. 3%e net income o 2006 is understated by-

a. P 622,00 b. P 60!,*00 c. P /68,00 d. P //*,*00

6. 3%e total amount o undamental error is-

a. P 1&6,000 b. P 1/&,/00 c. P 10&,/00 d. P 2/,000

&. 3otal toc7%olders# >4uity at year:end is-

a. P 2,!2*,*00 b. P 2,22*,*00 c. P 2,22&,00 d. P 2,0**,00

8. 3%e correctin entry o item H!I assumin t%e company#s boo7s were already closed is-
a. No ad$ustment
b. Retained earnins 2,/00
Cost o sales 2,/00
c. Cost o sales 2,/00
Retained earnins 2,/00
d. Retained >arnins 2,/00
nventory 2,/00

Solution
1& ,epreciation expense 16'000
 #ccu!ulated depreciation 16'000
2& ost o sales -beg& in. *5'000
Retained earnings *5'000
3& ost o sales 42'500
Inentory 42'500
4& as< 2)'000
 #ccounts receiable 2)'000
5& #ccu!ulated depreciation 110'000
@ac<inery *1'500
8ain on sale 1)'500
6& oss on da!ages 625'000
Esti!ated liability on da!ages 625'000
(& :nrealiAed <olding loss 26'000
>aluation allo$ance 26'000
@arBet alue ; beg& 1*0'000
@arBet alue ; end 164'000
:nrealiAed <olding loss 26'000
)& alaries payable 4)'000
alaries expense 4)'000
=o reerse accrued salaries&
alaries expense 36'600
alaries payable 36'600
*& E?uip!ent 1'600'000

16
 Repairs expense 1'600'000
,epreciation expense 200'000
 #ccu!ulated depreciation 200'000
10& Insurance expense 25'000
Prepaid insurance 3('500
Retained earnings 62'500
11& "o a!ortiAation since no inor!ation about its i!pair!ent&

 #ns$er%
1&  2&  3&  4& , 5&  6& # (& # )& ,

Problem 6
=atias Corporation re4uires audited inancial statements or credit purposes. +ter ma7in
normal ad$ustin entries, but beore closin t%e accountin records or t%e year ended
"ecember !1, 2006. =atias#s controller prepared t%e ollowin inancial statements or
2006-
=atias Corporation
3+3>=>N3 O; ;N+NC+F PO3ON
,ece!ber 31' 2006
 #ssets
Cas% 1,22/,000
=ar7etable e4uity securities 12/,000
+ccounts Receivable 60,000
+llowance or doubtul accounts 5 //,000
nventories /!0,000
Property and e4uipment 620,000
+ccumulated "epreciation 5 280,000
3otal +ssets 2,62/,000

iabilities and tocB<oldersC E?uity 

+ccounts payable and accrued liabilities 1,68/,000
ncome ta' payable 110,000
Common stoc7, P20 par !00,000
+dditional paid:in capital &/,000
Retained earnins //,000
3otal liabilities and stoc7%olders# e4uity 2,62/,000

=atias Corporation
3+3>=>N3 O; NCO=>
7or t<e Year Ended ,ece!ber 31' 2006
Net ales 1,&00,000
Cost o sales /&0,000
Dross Proit 1,1!0,000
Operatin >'penses
ellin and administrative 8,000
  "epreciation 2,000
ncome beore income ta' 60,000
ncome ta' e'pense 1*2,000
Net ncome 8,000

=atias#s ta' rate or all items was !0 or all aected years, and it made estimated ta'
payments w%en due. =atias %as been proitable in t%e past and e'pects results in t%e uture
to be similar to 2006. "urin t%e course o t%e audit, t%e ollowin additional inormation
5not considered w%en t%e above statements were prepared was obtained-

17
1. 3%e investment portolio consists o s%ort:term investment, classiied as available:or:
sale, or w%ic% total mar7et value e4ualed cost at "ecember !1, 200/. On ;ebruary 2,
2006, =atias sold one investment wit% a carryin value o P100,000 or P1!0,000. 3%e
total o t%e sale proceeds was credited to t%e investment account.

2. +t "ecember !1, 2006, t%e mar7et value o t%e remainin securities in t%e portolio was
P12,000.

!. 3%e P/!0,000 inventory total, w%ic% was based on a p%ysical count at "ecember !1,
2006, was priced at cost. ubse4uently, it was determined t%at t%e inventory cost was
overstated by P66,000. +t "ecember !1, 2006, t%e inventory#s mar7et value
appro'imated t%e ad$usted cost.

. Pollution control devices costin P8,000, w%ic% is %i% in relation to t%e cost o t%e
oriinal e4uipment, were installed on "ecember 2*, 200/, and were c%ared to repairs in
200/.

/. 3%e oriinal e4uipment reerred to in tem , w%ic% %ad a remainin useul lie o si'
years on "ecember 20, 200/, is bein depreciated by t%e strai%t:line met%od or bot%
inancial and ta' reportin.

6. + lawsuit was iled aainst =atias Corporation in October 2006 claimin damaes o 
P2/0,000. Company#s leal counsel believes t%at an unavorable outcome is probable,
and a reasonable estimate o t%e court#s award to t%e plainti is P60,000, w%ic% will be
paid in 200& i t%e case is settled.

+uestions
1. =ar7etable >4uity ecurities at year:end is-
a. P 1//,000 b. P 12/,000 c. P */,000 d. P 82,000

2. +llowance or mar7et decline in value o mar7etable e4uity security at year:end is-
a. P 0 b. P 8,000 c. P 10,000 d. P 1!,000

!. nventory at year:end is-

a. P 6,000 b. P /12,000 c. P /!0,000 d. P /*6,000

. Cost o sales at year:end is-

a. P 6!6,000 b. P /&0,000 c. P //0,000 d. P /0,000

/. Net income o t%e company is-

a. P !**,&00 b. P !&*,000 c. P !66,100 d. P !!1,000

Solution
1& @arBetable e?uity securities 30'000
8ain on sale 30'000
2& oss on !arBet decline 13'000
 #llo$ance or !arBet decline 13'000
3& ost o sales 66'000
Inentory 66'000
4& E?uip!ent 4)'000
Retained earnings 4)'000
5& ,epreciation )'000
 #ccu!ulated depreciation )'000
6& oss on da!ages 60'000
Esti!ated liability on da!ages 60'000
 #ns$er%

18
1& # 2& , 3& # 4& # 5&   

Problem 7
Fon establis%ed a retail business in 200. >arly in 200&, Fon entered into neotiations
wit% %ort wit% t%e intent to orm a partners%ip. ou %ave been as7ed by Fon and %ort to
c%ec7 Fon#s boo7s or t%e past t%ree years to %elp %ort evaluate t%e earnins potential o 
t%e business.

3%e net incomes reported on statements submitted to you were as ollows-

ear endin 12E!1

200 200/ 2006
ncome, preta' P6!,000 P &0,&6! P 61,880

"urin t%e e'amination o t%e accounts, you ound t%e data iven below-

;or year ended "ec. !1

200 200/ 2006
Omission rom t%e boo7s

a. +ccrued e'penses at end o year P 1/,120 P 1,6/8 P !2,!68

b. >arned 5uncollected revenue at end
o year 1,00
c. Prepaid e'penses at end o year 6,!1 8,&0 *,82
d. <nearned revenue 5collected in advance
at end o year ,2&0

Doods in transit at end o year omitted rom

inventory

e. Purc%ase or w%ic% t%e entry %ad been made

5owners%ip passed 18,2&0 21,60
. Purc%ase or w%ic% t%e entry %ad not been made
5owners%ip not passed 11,*&0 1!,&10

Ot%er points re4uirin considerations-

. On anuary 1, 2006, sold operational e4uipment or P!1,/00 t%at oriinally cost P!/,000
on anuary 1, 200. Cas% was debited or P!1,/00 and e4uipment was credited or
P!1,/00. 3%e asset sold was depreciated in 200 and 200/ but not on t%e 2006 on t%e
basis o a 10:year lie and no residual value.

%. No allowance or bad debts %as been set up. +n analysis o accounts receivable as o 
"ecember !1, 2006, indicates t%at t%e allowance account s%ould %ave a balance o 
P1,000, o w%ic% P!,/00 relates to 200, P,*00 to 200/, and P/,600 to 2006.

+uestions
1. +d$usted net income o 200 is-
a. P 8/,8! b. P 82,!! c. P /2,0* d. P !*,66

2. +d$usted net income o 200/ is-

a. P 81,66* b. P 81,081 c. P 80,1/& d. P &6,&6*

19
!. +d$usted net income o 2006 is-
a. P 86,/02 b. P /6,682 c. P /1,082 d. P 2,682
. nventory at year:end is understated by-
a. P !,!&0 b. P &,*!0 c. P 21,60 d. P !/,!/0

/. +ccrued e'penses at year:end is-

a. Overstated by P1&,&10 c. <nderstated by P!1,*08
b. <nderstated by P!2,!68 d. <nderstated by P1&,&10

Solution

2004 2005 2006

:nadusted net inco!e 63'000 (0'(63 61'))0
Ite! # -15'120. 15'120
-14'65). 14'65)
-32'36).
Ite!  1'400 -1'400.
Ite!  6'314 -6'314.
)'4(0 -)'4(0.
*')42
Ite! , -4'2(0. 4'2(0
Ite! E 1)'2(0 -1)'2(0.
21'640
Ite! 7   
Ite! 8 3'500
Ite! D -3'500. -4'*00. -5'600.
 #dusted net inco!e 52'0*4 )1'0)1 51'0)2
 #ns$er%
1&  2&  3&  4&  5& 

Problem 8
MFF+ F"+ CO. 3%e records o t%e Company %ave not been e'amined or t%e t%ree:year
period ended "ecember !1, 2006. +s a result o your audit o t%e records or t%e year
ended "ecember !1, 2006 and your review o t%e records o t%e two prior years, it is
necessary to revise t%e net income and t%e retained income based upon t%e audited data,
w%ic% ollows-

3%e company#s retained income at "ecember !1, 2006 ollows-

Aalance, 12E!1E0 P *0,000

Net income, 200/ 100,000
Net income, 2006 110,000
Aalance, 12E!1E06 P!00,000

;rom your e'amination, you obtained t%e ollowin inormation w%ic% must be ta7en into
consideration at t%e close o t%e year involved-

"ecember !1, 200

1. Doods consined out to consinees are included in t%e inventory at

P120,000, w%ic% is 20 percent in e'cess o cost.
2. >4uipment wit% a 10:year:lie was purc%ased or P!0,000 and c%ared to
e'pense on "ecember !1.
!. 3%e ollowin liabilities are omitted rom t%e records-
=aterials included in inventory P !,000
+ccrued ta'es ,100

20
"ecember !1, 200/

. <ncollectible accounts receivable o P*,000 are to be written o.

/. =ar7etable ecurities costin P1/,000 were at a mar7et value o only
P*,000.
6. Dain o P!,000 on sale o ully depreciated e4uipment was credited to t%e
allowance or depreciation.
&. Fand cost o P*,000 %ad been erroneously c%ared to e'pense.
8. 3%e inventory is overstated by P1,!00 because o an error in ootin an
inventory price s%eet.
*. "epreciation was omittedG P/,000 s%ould be provided.

"ecember !1, 2006

10. 3%e ollowin liabilities are omitted rom t%e records-

;or purc%ases o new mac%inery on "ecember !1, 2006 P12,000
+ccrued ta'es /,*00

+uestions
1. +d$usted net income o 200/ is-
a. P 11*,00 b. P 110,800 c. P 102,600 d. P *0,800

2. +d$usted net income o 2006 is-

a. P 8*,800 b. P *8,600 c. P 11/,00 d. P 1/,00

!. +d$usted retained earnins o 200 is-

a. P 112,*00 b. P 10*,*00 c. P *2,*00 d. P 8*,*00

. +d$usted retained earnins o 200/ is-

a. P 180,&00 b. P 20!,&00 c. P 212,/00 d. P 212,!00

/. +d$usted retained earnins o 2006 is-

a. P 16,200 b. P 16,000 c. P !1*,100 d. P 2*6,100

6 3%e entry to correct inormation Hnumber !I at "ecember !1, 2006 is-

a. Retained earnins ,100
+ccrued ta'es ,100
b. Cost o sales !,000
+ccounts payable !,000
c. Retained earnins ,100
Cost o sales !,000
+ccrued ta'es ,100
+ccounts payable !,000
d. No ad$ustin entry is necessary.

*. 3%e entry to correct inormation Hnumber I at "ecember !1, 2006 is-

a. +llowance or bad debts *,000
+ccounts receivable *,000
b. Retained earnins *,000
+ccounts receivable *,000
c. Retained earnins *,000
+llowance or bad debts *,000

21
 d. No ad$ustin entry is necessary

8. +d$usted net income o 200 5assumin P8/,000 is recorded as net income o 200 is-
a. P 116,*00 b. P 11/,000 c. P 10&,*00 d. P 8&,*00

Solution
1& "o adust!ent since t<e 2004 inancial state!ent $as not aected&
2& E?uip!ent 30'000
Retained earnings 30'000
Retained earnings 3'000
,epreciation expense 3'000
 #ccu!ulated depreciation 6'000
3& "o adust!ent since t<e 2004 inancial state!ent $as not aected&
4& #llo$ance or bad debts *'000
 #ccounts receiable *'000
5& Retained earnings 6'000
 #llo$ance or !arBet decline 6'000
6& #ccu!ulated depreciation 3'000
Retained earnings 3'000
(& and *'000
Retained earnings *'000
)& Retained earnings 14'300
ost o sales 14'300
*& Retained earnings 5'000
 #ccu!ulated depreciation 5'000
10& @ac<inery 12'000
 #ccounts payable ; ot<ers 12'000
=axes 5'*00
 #ccrued taxes 5'*00

2004 2005 2006

:nadusted net inco!e 100'000 110'000
Ite! 1 -20'000. 20'000
Ite! 2 30'000 -3'000. -3'000.
Ite! 3 -3'000. 3'000
-4'100. 4'100
Ite! 4   
Ite! 5 -6'000.
Ite! 6 3'000
Ite! ( *'000
Ite! ) -14'300. 14'300
Ite! * -5'000.
Ite! 10 999999999 999999999 -5'*00.
 #dusted net inco!e 110')00 115'400
Retained earnings  beg *0'000 203'(00
 #dust!ents%
Ite! 1 -20'000.
Ite! 2 30'000
Ite! 3 -3'000.
-4'100. 999999999
Retained earnings  end 203'(00 31*'100
 #ns$er%
1&  2&  3&  4&  5&  6& , (& # )& ,

Problem 9
3%e Corporation prepared its own income statement or t%e years 200/ and 2006. 3%e
President was not satisied and decided to enae t%e services o a CP+. 3%e ollowin
errors were discovered by t%e CP+-
 KKK200/KK KKK2006KKK
Net income ater income ta' P 12!,2/0 P 1/6,2/0
nventory understatement at year:end P : P 12,/00

22
 Prepaid e'penses not ta7en up /,000 1/,000
=erc%andise purc%ased on account not
Recorded as liability but included in
inventory 2/,000
<nearned rent received ta7en into income *,000
+ccrued ta'es unrecorded 20,000 1/,000

+uestions
1. Net income o 200/ is-
a. P 16!,2/0 b. P 108,2/0 c. P 8!,2/0 d. P &!,2/0

2. Net income o 2006 is-

a. P 1**,&/0 b. P 1&,&/0 c. P 1,&/0 d. P 12,2/0

Solution
2005 2006
:nadusted net inco!e 123'250 156'250
12'500
5'000 -5'000.
15'000
-25'000. 25'000
-*'000.
-20'000. 20'000
 9999999999 -15'000.
 #dusted net inco!e )3'250 1**'(50
 #ns$er%
1&  2& #

Problem 1O
(i9ard Company, a calendar:year sole proprietors%ip, maintained its boo7s on t%e cas% basis
durin t%e year

(i9ard is in t%e process o neotiatin a ban7 loan to inance t%e planned e'pansion o its
business. 3%e ban7 is re4uestin 2006 inancial statements prepared on t%e accrual basis o 
accountin rom (i9ard. +s (i9ard#s e'ternal auditor, you were called upon to assist in
preparin t%e inancial statements. 3%e ollowin inormation were obtained durin t%e
course o your enaement-
(i9ard Company
3R+F A+F+NC>
"ecember !1, 2006
"ebits Credits
Cas% P8,000
+ccounts receivable, 12E!1E0/ 28!,/00
nventory, 12E!1E0/ 1,08/,000
;urniture  ;i'tures 2,068,/00
Fease%old improvements &8&,/00
+ccumulated depreciation, 12E!1E0/ P /6&,000
+ccounts payable 2*&,/00
(i9ard, "rawins
(i9ard, Capital, 12E!1E0/ 2,180,/00
ales 11,2&,/00
Purc%ases /,!!*,2/0
alaries e'pense !,0/,000
3a'es and licenses 21&,000
nsurance e'pense 1/2,2/0
Rent e'pense /*8,/00

23
 <tilities e'pense 220,/00
Fivin e'penses 22&,/00 KKKKKKKKK
P 1,&2,/00 P 1,&2,/00
+dditional inormation-

1. +t "ecember !1, 2006, amounts due rom customers totaled P1/,000.

2. Aased on t%e analysis o t%e above receivables, P20,&/0 may prove uncollectible.

!. <npaid invoices or t%e plant purc%ases totaled P/!!,&/0 and P2*&,/00 at "ecember !1,
2006 and "ecember !1, 200/ respectively.

. 3%e inventory totaled P1,2&,000 based on a p%ysical count o t%e oods at "ecember
!1, 2006. 3%e inventory was priced at cost, w%ic% appro'imates mar7et value.

/. On =ay 1. 2006, (i9ard paid P1/2,2/0 to renew its compre%ensive insurance coverae
or one year. 3%e premium on t%e previous policy, w%ic% e'pired on +pril !0, 2006, was
P1!6,/00.

6. On anuary 2, 2006, (i9ard entered into a twenty:year operatin lease or t%e vacant lot
ad$acent (i9ard#s retail store used as a par7in lot. +s areed in t%e lease, (i9ard paved
and enced in t%e lot at a cost o P&8&,/00. 3%e improvements were completed on +pril
1, 2006, and estimated to %ave a useul lie o iteen years. No provision or
depreciation %as been recorded. "epreciation on urniture and i'tures was P210,000 or
2006.

&. +ccrued e'penses at "ecember !1, 2006 and 200/ were as ollows-
2006 200/
3a'es and licenses P!!,&/0 P20,2/0
<tilities !6,000 2,&/0
P6*,&/0 P/,000

8. (i9ard is bein sued or P,000,000. 3%e coverae under t%e compre%ensive insurance
policy is limited to P2,/00,000. (i9ard#s attorney believes t%at an unavorable outcome
is probable and t%at a reasonable estimate o t%e settlement is P!,000,000.

*. 3%e salaries account includes P0,000 per mont% paid to t%e proprietor. (i9ard also
receives P,!&/ per wee7 or livin e'penses.

+uestions
"etermine t%e balances o t%e ollowin under t%e accrual basis o accountin.

1. +ccounts Receivable
a. 1/,000 b. P 28!,/00 c. P 1!1,/00 d. P 1/2,000

2. +ccounts Receivable, net

a. P 08,2/ b. P 0,62/ c. P !*,2/0 d. P 262,/00

!. nventory
a. P 1,2&,000 b. P 1,08/,000 c. P 18*,000 d. P 8*6,000

. Prepaid nsurance
a. P 1&,000 b. P *6,2/0 c. P /0,&/0 d. P0

24
/. Property and e4uipment, net
a. P 2,8/6,000 b. P 2,616,6* c. P 2,0!*,62/ d. P 1,8/8,/00
6. +ccounts payable
a. P /!!,&/0 b. P /2!,&/0 c. P 2*&,/00 d.P 2!6,2/0

&. +ccrued >'penses

a. P 11,&/0 b. P 6*,&/0 c. P 2,&/0 d. P0

8. (i9ard, "rawins
a. P &0&,/00 b. P 80,000 c. P 22&,/00 d. P0

*. (i9ard, Capital, 12E!1E0/

a. P 2,226,000 b. P 2,181,000 c. P 2,180,/00 d. P 2,1!/,/00

10. ales
a. P 11,82,/00 b. P 11,//*,000 c. P 11,2&,/00 d. P 11,2*6,000

11. Purc%ases
a. P /,8&!,000 b. P /,/&/,/00 c. P /,!!*,2/0 d. P /,10!,000

12. alaries >'pense

a. P !,2&2,/00 b. P !,0/,000 c. P 2,6//,000 d. P 2,/6/,000

1!. 3a'es and licenses

a. P 2/0,&/0 b. P 2!0,/00 c. P 21&,000 d. P 20!,/00

1. nsurance e'pense

a. P 1*&,&/0 b. P 1&,000 c. P 1/2,2/0 d. P 101,/00

1/. <tilities e'pense

a. P 2/6,/00 b. P 2!1,&/0 c. P 220,/00 d. P 1*/,&/0

16. "oubtul account e'pense

a. P 20,&/0 b. P 10,!&/ c. P 6,/&/ d. P 0

1&. "epreciation e'pense

a. P 2*,!&/ b. P 2*,!&/ c. P 2!*,/!1 d. P 210,000

18. Cost o sales

a. P /,!86,/00 b. P /,!68,/00 c. P /,1/0,2/0 d. P ,06/,000

1*. >stimated loss rom lawsuit

a. P ,000,000 b. P !,000,000 c. P /00,000 d. P0

Solution
1& #  P415'000 gien in ite! no& 1
2&   P3*4'250 -P415'000 ; P20'(50 ite! no& 2.
3& #  P1'2(4'000 gien in ite! no& 4
4&   P152'250 x 4/12  P50'(50
5&  
7urniture  ixtures 2'06)'500
ease<old i!proe!ents ()('500
ess% #ccu!ulated depCn ; 1/1/02 - 5 6('000.
2002 ,epreciation ; i!proe& - 3*'3(5.

25
 2002 ,epCn ; urniture - 210'000 .
arrying alue ; 2002 2'03*'625  
6& #  P533'(50 gien in ite! no& 3
(&   P6*'(50 gien in ite! no& (  
)& #
alaries ; P40'000 x 12  P 4)0'000
iing allo$ance P4'3(5 x 52 $eeBs  22('500
=otal (0('500
*& 
apital ; beg& 2'1)0'500
F!ission o prepai d expense in 2001 45'500
F!ission o accrued expenses in 2001 - 45'000 .
=otal 2'1)1'000
10& 
ales ; cas< basis  11'42('500
G #R ; end  415'000
 #R ; beg  2)3'500
ales ; accrual basis  11'55*'000
11& 
Purc<ases ; cas< basis  5'33*'250
G #P ; end  533'(50
 #P ; beg  2*('500
Purc<ases ; accrual basis  5'5(5'500
12& ,
alaries per record  3'045'000
 alaries o t<e proprietor H  4)0'000
 #dusted alaries  2'565'000
H alaries o t<e proprietor or a partners<ip is considered as part o proit distribution
13& 
=axes and licenses ; cas< basis  21('000
G #ccrued taxes ; end  33'(50
 #ccrued taxes ; beg  20'250
=axes and licenses ; accrual basis  230'500
14& 
Insurance expense ; cas< basis  152'250
G Prepaid insurance ; beg  45'500
 Prepaid insurance ; end  50'(50
Insurance expense ; accrual basis  14('000
15& 
:tilities ; cas< basis  220'500
G #ccrued utilities ; end  36'000
 #ccrued utilities ; beg  24'(50
:tilities ; accrual basis  231'(50
16& # ; gien in ite!  2
1(&  ; reer to +uestion  5 ?uestion
1)& #
eginning inentory  1'0)5'000
Purc<ases  5'5(5'500
Ending inentory  -1'2(4'000 .
ost o ales  5'3)6'500
1*& 
ince t<ere is a co!pre<ensie insurance policy or t<e da!age' only P500'000 $ill be c<arged as loss -3@ ;
2&5@.

Problem 11
ou %ave been enaed to e'amine t%e inancial statements o Mince Corporation or t%e
year ended "ecember !1, 2006. n t%e course o your e'amination, you %ave ascertained
t%e ollowin inormation-

1. Mince uses t%e allowance met%od o accountin or uncollectible trade accounts
receivable. 3%e allowance is based upon ! o past due accounts 5over 120 days and
1 o current accounts as o t%e close o eac% mont%. "ue to t%e c%anin economic
conditions and climate, t%e amount o past due accounts %as increased siniicantly, and

26
 manaement %as decided to increase t%e percentae based on past due accounts to /.
3%e ollowin balances are available-

+s o  +s o 
Nov. !0, 2006 "ec. !1, 2006

"ebit Credit "ebit Credit

+ccounts Receivable P !*0,000 : P !0,000 :

Past due accounts 5included   12,00
in +ccounts Receivable 0 : !0,000 :
+llowance or uncol:
lectible accounts : P 28,000 *,000 :

2. 3%e merc%andise inventory on "ecember !1, 200/ did not include merc%andise
%avin a cost o P&,000.00 w%ic% was stored in a public ware%ouse. =erc%andise %avin
a cost o P!,000.00 was erroneously counted twice and included twice in t%e
merc%andise inventory on "ecember !1, 2006. Mince uses a periodic inventory system.

!. On anuary 2, 2006, Mince %ad a new mac%ine delivered and installed in its new
actory. 3%e cost o t%is mac%ine was P*&,000.00 and t%e mac%ine is bein depreciated
on a strai%t:line met%od over an estimated useul lie o 10 years. (%en t%e new
mac%ine was installed, Mince paid or t%e ollowin items w%ic% were not included in t%e
cost o t%e mac%ine, but were c%ared to repairs and maintenance-
"elivery >'pense : P 2,/00.00
nstallation Costs : 8,000.00
Rearranement o related >4uipment : ,000.00
P1,/00.00

. On =ay !, 2006, Mince e'c%aned /00 s%ares o treasury stoc7 5P/0.00 par value
common stoc7 or a parcel o land to be used as a site or a new actory. 3%e treasury
stoc7 %ad a cost P&0.00 per s%are w%en it was ac4uired and on =ay 0!, 2006, it %ad a
air value o P80.00 per s%are. Mince received P2,000.00 w%en an e'istin buildin on
t%e land was sold or scrap. 3%e land was capitali9ed at P0,0000.00 and Mince recorded
a ain o P/,000.00 on t%e sale o its treasury stoc7.

ou ound t%e ollowin $ournal entries in t%e boo7s-

Fand . . . . . . . . . . . . . . . P 0,000.00
3reasury stoc7 . . . . . . . . . . . . . . P !/,000.00
Dain on ale o treasury stoc7 . . . . . /,000.00

Cas% . . . . . . . . . . . . . . . P 2,000.00
=iscellaneous ncome . . . . . . . . . . P 2,000.00

/. On anuary 02, 2006, Mince Corporation establis%ed a noncontributory deined

beneit plan coverin all employees and contributed P 1,000,000.00 to t%e plan and
c%ared t%is amount to t%e Hpension e'penseI. +t "ecember !1, 2006, Mince determined
t%at t%e 2006 current service and interest costs on t%e plan amount to P 620,000,00.
3%e e'pected and actual rate o return on plan assets or 2006 was 10.

+uestions
1. 3%e allowance or uncollectible accounts to be reported on t%e Aalance %eet is-
a. P 1,/00.00 b. P *,000.00 c. P /,/00.00 d. P ,000.00

27
2. "oubtul account e'pense at "ecember !1, 2006 is-
a. P 1,/00.00 b. P *,000.00 c. P /,/00.00 d. P ,000.00
!. 2006 merc%andise inventory is-
a. <nderstated by P 10,000.00 c. Overstated by P !,000.00
b. <nderstated by P ,000.00 d. Overstated by P ,000.00

.  no proper correctin entries were made at "ecember !1, 200/, by %ow muc% will
200/ net income beore income ta'es be overstated or understated)
a. <nderstated by P&,000.00 c. Overstated by P &,000.00
b. <nderstated by P,000.00 d. Overstated by P ,000.00

/. =ac%inery and e4uipment account s%ould be reported in t%e balance s%eet 5net o 
accumulated depreciation at "ecember !1, 2006-
a. P 100,!/0.00 b. P 110,0/0.00 c. P 111,/00.00 d. P 101,800.00

6. Fand account s%ould be reported in t%e balance s%eet at "ecember !1, 2006-
a. P !/,000.00 b. P !!,000.00 c. P 0,000.00 d. P !8,000.00

&. (%at s%ould be reported at "ecember !1, 2006 as prepaid pension cost)
a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 80,000.00

8. (%at amount s%ould be reported as pension e'pense in 2006)

a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 80,000.00

*. @ow muc% ain s%ould be reported on item no. )

a. P /,000.00 b. P 1/,000.00 c. P 10,000.00 d. P 0

10.  no proper correctin entries were made at "ecember !1, 2006, by %ow muc% will
2006 net income beore income ta'es be overstated or understated)
a. <nderstated by P *!,/0.00 c. Overstated by P /!*,0/0.00
b. <nderstated by P /!,0/0.00 d. Overstated by P *8,/0.00

Solution
 -1. ,oubtul #ccount Expense 14'500&00
 #llo$ance or ,/# 14'500&00
Re?uired allo$ance as o 12&31&2006
on past due accounts -5J x P30'000&00. P 1'500&00
on current accounts -1J x P400'000&00. 4'000&00
=otal P 5'500&00
:nadusted KdebitL balance o #llo$ance or ,/# *'000&00
#dditional Proision -expense. P14'500&00
-2. a& @erc<andise Inentory' 01&01&2006 ('000&00
Retained Earnings ('000&00
-to correct understate!ent o inentory at end o 2005.
b& ost o ales 3'000&00
@erc<andise Inentory' 12&31&2006 3'000&00
-to correct oerstate!ent ending inentory or 2006.
-3. a& @ac<inery 14'500&00
Repairs and @aintenance 14'500&00
-to reclassiy deliery and installation costs.
b& ,epreciation Expense 1'450&00
 #ccu!ulated ,epreciation 1'450&00
-to proide or depreciation or ite!s not capitaliAed.
-4. @iscellaneous Inco!e 2'000&00
8ain on ale o =reasury tocB 5'000&00
and 2'000&00
 #PI=/ 5'000&00

28
 -to correct clientCs entry on t<e purc<ase o land.
-5. Prepaid Pension ost 4)0'000&00
Pension Expense 4)0'000&00
-to correct clientCs entry in t<e treat!ent o prepaid pension cost.
urrent erice and interest cost P 620'000&00
Expected return on Plan #sset 
-P 1'000'000&00 x 10J. - 100'000&00.9
Pension Expense P 520'000&00
Reported pension expense 1'000'000&00
Prepaid Pension ost P 4)0'000&00
 #ns$er%
1&  2& # 3&  4& # 5& # 6& , (& , )&  *& , 10& ,

Problem 12
Ron:Ron torae underwent a restructurin in 2006. 3%e company conducted a t%orou%
internal audit, durin w%ic% t%e ollowin acts were discovered. 3%e audit occurred durin
2006 beore any ad$ustin entries or closin entries are prepared.

a. +dditional printers were ac4uired at t%e beinnin o 200 and added to t%e company#s
oice networ7. 3%e P*,000 cost o t%e printers was inadvertently recorded as
maintenance e'pense. 3%e printers %ave ive:year useul lives and no material salvae
value. 3%is class o e4uipment is depreciated by t%e strai%t:line met%od.

b. 3%ree wee7s prior to t%e audit, t%e company paid P/1,000 or storae bo'es and
recorded t%e e'penditure as oice supplies on %and. 3%e error was discovered a wee7
later.

c. On "ecember !1, 200/, inventory was understated by P112,000 due to a mista7e in t%e
p%ysical inventory count. 3%e company uses t%e periodic inventory system.

d. 3%ree years earlier, t%e company recorded a ! stoc7 dividend 5,000 common s%ares,
P1 as ollows-

Retained earnins ,000

Common stoc7 ,000

3%e s%ares %ad a mar7et price at t%e time o P10 per s%are.

e. +t t%e end o 200/, t%e company ailed to accrue interest e'pense t%at accrued durin
t%e last our mont%s o 200/ on bonds payable. 3%e bonds w%ic% were issued at ace
value mature in 2010. 3%e ollowin entry was recorded on =arc% 1, 2006, w%en t%e
semi:annual interest was paid-

nterest e'pense 180,000

Cas% 180,000

. + t%ree:year liability insurance policy was purc%ased at t%e beinnin o 200/ or
P216,000. 3%e ull premium was debited to insurance e'pense at t%e time.

+uestions

1. Net income o 200 is-

a. Overstated by P*,000 c. Overstated by P&,200
b. <nderstated by P*,000 d. <nderstated by P&,200

29
2. Net income o 200/ is
a. <nderstated by P!&,200 c. <nderstated by P8*,800
b. <nderstated by P1!,200 d. Overstated by P81,800
!. Net income o 2006 is
a. Overstated by P6/,800 c. Overstated by P!0/,800
b. Overstated by P18/,800 d. <nderstated by P!8,200

. +ccrued interest on Aonds Payable is

a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000

Solution
2004 2005 2006
 # *'000
-1')00. -1')00. -1')00.

 112'000 -112'000.
,
E -120'000. 120'000
-120'000.
7 999999999 144'000 -(2'000.
:nder/-Fer. ('200 134'200 1)5')00
 #ns$er%
1& , 2&  3&  4&   

Problem 13
ou been as7ed by a client to review t%e records o t%e Claire oy Company, a small
manuacturer o precision tools and mac%ines. our client is interested in buyin t%e
business, and arranements %ave been made or you to review t%e accountin records.

our e'amination reveals t%e ollowin-

a. Claire oy Company commenced business on +pril 1, 200!, reportin on a iscal year
endin =arc% !1. 3%e company %as never been audited, but t%e annual statements
prepared by t%e boo77eeper relect t%e ollowin income beore closin and beore
deductin income ta'es-

ear >nded =arc% !1 ncome Aeore 3a'es

200 P &1,600
200/ 111,00
2006 10!,/80

b. + relatively small number o mac%ines %ave been s%ipped on consinment. 3%ese

transactions %ave been recorded as an ordinary sale and billed as suc%. On =arc% !1 o 
eac% year, mac%ines billed and in t%e %ands o consinees amounted or-
200.. P&, 800
200/.. none
2006.. /, /*0

ales price was determined by addin !0 to cost. ou learned t%at t%e consined
oods were sold t%e ollowin year.

c. On =arc% !0, 200/, two mac%ines were s%ipped to a customer on a C.O.". basis. 3%e
sale was not entered until +pril /, 200/ w%en cas% was received or P6,100. 3%e
mac%ines were not included in t%e inventory at =arc% !1, 200/. 53itle passed on =arc%
!0, 200/.

30
d. +ll mac%ines are sold sub$ect to a ive:year warranty. t is estimated t%at t%e
e'pense ultimately to be in connection wit% t%e warranty will amount to  o 1 o 
sales. 3%e company %as c%ared an e'pense account or warranty costs incurred.
ales per boo7s and warranty costs were-
Marranty o Expense or ales @ade in
Year Ended @arc< 31ales 2004 2005   2006 =otal  
200 P*0, 000 P&60 P&60
200/ 1, 010, 000 !60 P1, !10 1, 6&0
2006 1, &*/, 000 !20 1, 620 P1, *10 !, 8/0

e. 3%e ban7 deducts 6 on all contracts inanced. O t%is amount  is place in a reserve
to t%e credit o Claire oy Company, w%ic% is reunded to Claire oy as inance contracts
are paid in ull. 3%e reserve establis%ed by t%e ban7 %as not been relected in t%e boo7s
o Claire oy. 3%e e'cess o credits over debits 5net increase to t%e reserve account
wit% Claire oy, on t%e boo7s o t%e ban7 or eac% iscal year were as ollows-
200. P , 000
200/. , 000
2006. /, 000
P 1, 000

. + delivery e4uipment wit% a 10:year lie 5no residual value, strai%t:line depreciation
was purc%ased on +pril 1, 200/ by issuin a P 600,000 non: interest: bearin,  year
note. 3%e entry made to record t%e purc%ase was a debit to "elivery >4uipment and a
credit to Notes payable or P 600,000G a 10 is a air rate o interest on t%e note. 3%e
accountant ailed to provide or depreciation or t%e year on t%is e4uipment.

. ;or t%e last t%ree 5! years, t%e company %as ailed to accrue salaries and waes. 3%e
correct amounts at t%e end o eac% iscal year were-
200. P 12, 000
200/. 18, 000
2006. 10, 000

+uestions
+nswer t%e ollowin 4uestions based on t%e audit indins. nore income ta' implications.

1. 3%e ad$ustin entry to set up t%e estimated Fiability under (arranties is

a. (arranty e'pense /,11
Retained earnins &,006
>stimated liability under warranties 12,1&
b. Retained earnins /,11
(arranty e'pense &,006
>stimated liability under warranties 12,1&
c. (arranty e'pense 12,1&
>stimated liability under warranties 12,1&
d. Retained earnins 12,1&
>stimated liability under warranties 12,1&

2. 3%e total receivable rom t%e ban7 representin dealers und reserve as o  
=arc% !1, 2006 is-
a. P /,100 b. P 6,*00 c. P 12,000 d. P 1,000

!. ales in 200 were 5over understated by

a. P 6,/00 b. P 56,/00 c. P &,800 d. P 5&,800

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. ales in 2006 were 5over understated by-
a. P 6,/00 b. P 56,100 c. P 5/,/*0 d. P 511,6*0
/. 3%e accrued alaries Payable t%at s%ould be set up on =arc% !1, 2006 is-
a. P 18,000 b. P 28,000 c. P 10,000 d. P 0,000

6. 3%e audited balance o "iscount on Note Payable as o =arc% !1, 2006 is-
a. P 0 b. P 102, /2 c. P 1*, 211 d. P 1*0, 1*2

&. "epreciation >'pense or iscal year 2006 t%at s%ould be provided on t%e
e4uipment purc%ased on +pril 1, 200/ is
a. P 1!,660 b. P 0,*81 c. P 60,000 d. P 66,000

Solution

 #dusting entry%

b& ales 5'5*0

 #ccounts receiable 5'5*0
Inentory 4'300
ost o sales 4'300
c& ales 6'100
Retained earnings  beg 6'100
d& Marranty expense 12'41(  
Esti!ated $arranty payable 12'41(  
2004 *40'000 ; (')00  *32'200
2005 1'010'000 G 6'100 ; (')00  1'023'*00
2006 1'(*5'000 ; 5'5*0 ; 6'100  1'()3'310
 #dusted balance  3'(3*'410
 N O o 1J  &005 
=otal Marranty expense  1)'6*(  
ess% Marranty paid  6'2)0
Esti!ated $arranty liability  12'41(  
e& 7und resere ro! t<e banB 14'000
Ft<er inco!e 14'000
& FE% ,eliery e?uip!ent 600'000
"otes payable 600'000
E% ,eliery e?uip!ent 40*')0)
,iscount on "P 1*0'1*2
"otes payable 600'000
 #d% ,iscount on "P 1*0'1*2
,eliery e?uip!ent 1*0'1*2
 #d% Interest expense 40'*)1
,iscount on "P 40'*)1
P40*')0) x 10J  P 40'*)1
g& Retained earnings 1)'000
alaries 1)'000
alaries 10'000
 #ccrued salaries 10'000

 #ns$er%
1&  2& , 3& , 4& , 5&  6&  (& 

Problem 14
ou are auditin t%e accounts o Leit% Qandro =erc%andisin Corporation or t%e year ended
"ecember !1, 2006. ou discover t%at t%e ad$ustments made in t%e previous audit or t%e
year 200/ were not entered in t%e accounts by Leit% Qandro#s boo77eeperG t%ereore, t%e
accounts are not in areement wit% t%e audited amounts as o "ecember !1, 200/. 3%e
ollowin ad$ustments were included in t%e 200/ audit report-

32
a. nvoices or merc%andise purc%ased on credit in "ecember 200/ were not
entered on t%e boo7s until payment o P12,000 was made in anuary 2006. 3%e
merc%andise was not included in t%e "ecember !1, 200/ inventory. 3%e company uses a
periodic inventory system.
b. nvoices or merc%andise received on credit in "ecember 200/ were not recorded
in t%e accounts until payment was made in anuary 2006G t%e oods were included in
t%e 200/ endin inventory, P18,000.

c. +llowance or doubtul accounts or 200/ was understated by P2,000 because bad
debts e'pense in 200/ was not recorded.

d. ellin e'pense or 200/, P/,000, was not recorded in t%e accounts until paid in
2006.

e. +ccrued w aes o P ,000 at "ecember ! 1, 2 00/, w ere not r ecorded in t %e

accounts until paid in anuary 2006.

. Prepaid insurance at "ecember !1, 200/ was understated by P600 because t%is
amount was included in 200/ e'pense. 3%e insurance policy e'pires on "ecember !1,
2006.

. ncome ta' e'pense o P2,00 or t%e last part o t%e year ended "ecember !1,
200/, was not recorded until paid in anuary 2006.

%. "epreciation o P*,000 was not recorded or 200/.

+uestions%
Aased on t%e inormation iven, answer t%e ollowin-

1. Net income o 200/ is overstated by

a. P 0,00 b. P !*,800 c. P !8,00 d. P 2*,00

2. Net income o 2006 is understated by

a. P 0,800 b. P !*,800 c. P 28,800 d. P 2&,800

!. Operatin e'penses o 200/ is understated by

a. P 21,800 b. P 21,800 c. P 20,600 d. P 1*,00

. Operatin e'pense o 2006 is overstated by

a. P 21,800 b. P 10,800 c. P *,000 d. P 8,00

/. Cost o sales o 2006 is

a. Overstated by P18,000 c. <nderstated by P6,000
b. <nderstated by P18,000 d. Not aected wit% error

Solution

 NET INCOME
2005 2006
 #& F!ission o purc<ases -12'000. 12'000
F!ission o inentory 12'000 -12'000.
& F!ission o purc<ases -1)'000. 1)'000
& -2'000.
, -5'000. 5'000
E -4'000. 4'000

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 7 600 -600.
8 -2'400. 2'400
D -*'000. 9999999
-3*')00. 2)')00

FPER#=I"8 ENPE"E
  2005 2006
 #

&
& -2'000.
, -5'000. 5'000
E -4'000. 4'000
7 600 -600.
8
D -*'000. 9999999
-1*'400. )'400
 #ns$er%
1&  2&  3& , 4& , 5& #

Pro0blem 15
3uburan Company was orani9ed durin 2002 by t%ree tec%nical e'perts to assemble 5parts
to be purc%ased rom suppliers and mar7et an electronic device t%at t%ey %ad previously
patented. No products were sold durin 2002G %owever, 200! and 200 produced siniicant
sales, but modest proits. "urin 200!, t%e company %ired boo77eeper w%o, alt%ou% very
industrious, %ad very little 7nowlede o accountin. Reali9in t%is competency problem, t%e
company is considerin enain an outside independent CP+ to as t%ey said Hstrai%ten
t%ins out and ma7e recommendations.I +mon numerous ot%er accountin problems,
ad$ustin entries %ave never been made. 3%e boo77eeper stated t%at Ht%e transactions are
recorded in t%e ri%t way w%en t%ey occur.I 

3%e ollowin 200/ transactions, and t%e way in w%ic% t%e boo77eeper recorded or
e'plained t%em, are bein discussed-

a. nventory J endin 200, P!0,000G endin 200/, P&,000 5by inventory count.
nventory o parts 1&,000
Purc%ases 1&,000

b. "epreciation J e4uipment 5purc%ased at t%e beinnin o 200 cost, P80,000G

estimated useul lie, 10 yearsG manuacturer#s recommended value at end o / years,
P10,000.
"epreciation e'pense &,000
>4uipment &,000

c. <npaid waes at year:end 200, P!,000G 200/, P11,000.

Record w%en paid, because t%at is w%en t%e waes re4uires t%e payment o resources
and Hit all events out anyway.I 
d. Note payable, P60,000, ive:year, 1/, interest payable eac% October !1G sined
November 1, 200.
nterest e'pense *,000
Cas% *,000
ecause t<is is t<e correct a!ount o interest eac< year 

34
e. Contract to deliver si' electronic devices, sined October 1/, 200/, pendin
assembly, P/,000.
"ue rom customers /,000
ales /,000

. Property ta'es or 200/, billed in November 200/, payable wit%out penalty up to
;ebruary 1/, 200, P*,000. Paid on ;ebruary 1, 2006.
;ebruary 1, 2006-
Property ta'es *,000
Cas% *,000

. +dvertisin costs or "ecember 200/, C%ristmas season, P1&,000. Paid, wit%in t%e
!0:day credit period, on anuary 26, 2006.

anuary 26, 2006-

+dvertisin 1&,000
Cas% 1&,000
+uestions%
Aased on t%e inormation iven, answer t%e ollowin-

1. nterest e'pense o t%e P60,000 note at "ecember !1, 200/ is

a. P 10,/00 b. P *,000 c. P &,/00 d. P 1,/00

2. nterest payable at "ecember !1, 200/ is

a. P *,000 b. P &,/00 c. P 1,/00 d. P &/0

!. nventory at "ecember !1, 200/ is

a. P 6,000 c. P !0,000
b. P &,000 d. Cannot be determined

. (aes e'pense at "ecember !1, 200/ is

a. <nderstated by P 1,000 c. <nderstated by P 8,000
b. <nderstated by P 11,000 d. Correctly stated

/. +ccrued e'penses at "ecember !1, 200/ is understated by

a. P !8,/00 b. P 12,/00 c. P 11,&/0 d. P 11,000

Solution
1& 
P 60'000 x 15J  P *'000
2&  
P 60'000 x 15J x 2/12  P 1'500
3&  8ien in ite! #
4&  
Retained earnings 3'000
Mages expense 3'000
Mages expense 11'000
Mages payable 11'000
5& #
Interest payable 1'500
Mages payable 11'000
Property taxes *'000
 #dertising 1('000
=otal 3)'500

35
Problem 16
Aran9uela Corporation reported t%e ollowin amounts o net income or t%e years ended
"ecember !1, 200!, 200 and 200/-

200! P12&,000
200 1/0,000
200/ 128,/00

ou are perormin t%e audit or t%e year ended "ecember !1, 200/. "urin your
e'amination, you discover t%e ollowin errors-

a. +s a result o errors in t%e p%ysical count, endin inventories were misstated as ollows-

"ecember !1, 200 P1,000 understated

"ecember !1, 200/ P2!,000 overstated

b. On "ecember 2*, 200/, Aran9uela recorded as a purc%ase, merc%andise in transit,

w%ic% cost P1/,000. 3%e merc%andise was s%ipped ;OA "estination and %ad not arrived
by "ecember !1. 3%e merc%andise was not included in t%e endin inventory.

c. Aran9uela records sales on t%e accrual basis but ailed to record sales on account made
near t%e end o eac% year as ollows

200! P,000
200 /,000
200/ !,/00

d. 3%e company ailed to record accrued oice salaries as ollows-

"ecember !1, 200! P10,000

"ecember !1, 200 1,000

e. On =arc% 1, 200, a 10 stoc7 dividend was declared and distributed. 3%e par value o 
t%e s%ares amounted to P10,000 and mar7et value was P1!,000. t%e stoc7 dividend was
recorded as ollows-

=iscellaneous e'pense P1!,000

Common stoc7 10,000
Retained earnins !,000

. On uly 1, 200, Aran9uela ac4uired a t%ree:year insurance policy. 3%e t%ree:year

premium o P6,000 was paid on t%at date, and t%e entire premium was recorded as
insurance e'pense.

36