Error Correction

Problem 1
State the effect (Overstated, Understated or No Effect) of each of the following errors made in 2019 on the 2019 and 2020
profit.
Description of Error 2019 Profit 2020 Profit

a. The ending inventory of 2019 is understated as a result of an error

in the count of goods on hand.
b. The ending inventory of 2019 is overstated as a result of the inclusion of
goods acquired and held on a consignment basis. No purchase was recorded
on the books in 2019.
c. A purchase of merchandise at the end of 2019 is not recorded until
payment is made for the goods in 2020. The goods purchased were included
in the inventory at the end of 2019.
d. A sale of merchandise at the end of 2019 is not recorded until collection
is made for the goods in 2020; the goods sold were excluded from the
inventory at the end of 2019.
e. The total of one week’s sales of merchandise during 2019 was credited to
other revenue.
f. No depreciation is taken in 2019 for equipment purchased in October
2019. The company reports on a calendar year basis and computes
depreciation to the nearest month.
g. Customer’s notes receivable was debited to accounts receivable in 2020.
h. Overstatement of 12/31/19 prepaid insurance.
i. Understatement of 12/31/19 unearned revenue.
j. Failure to accrue 12/31/19 revenue.
k. Failure to accrue 12/31/19 expense.

Problem 2
Amoy Co. reported the following net income figures without knowledge of inventory errors.
Year Reported Net Income Error in Ending Inventory
2015 500,000 Overstated 50,000
2016 520,000 Overstated 90,000
2017 540,000 Understated 110,000
2018 560,000 No error
2019 580,000 Understated 20,000
2020 600,000 Overstated 100,000

Required: Compute the adjusted net income figure for each of the 6 years after considering the inventory errors.
I. 2015 adjusted net income
II. 2016 adjusted net income
III. 2017 adjusted net income
IV. 2018 adjusted net income
V. 2019 adjusted net income
VI. 2020 adjusted net income

Problem 3
The December 31, year-end financial statements of Joy Company contained the following errors:
Dec. 31, 2019 Dec. 31, 2020
Ending inventory 48,000 under 40,500 over
Depreciation expense 11,500 under

An insurance premium of 330,000 was prepaid in 2019 covering the years 2019, 2020 and 2021. The entire amount was
charged to expense in 2019. In addition, on December 31, 2020, a fully depreciated machinery was sold for 75,000 cash,
but the sale was not recorded until 2021. There were no other errors during 2019 and 2020, and no corrections have been
made for any of the errors. Ignore income tax effects.

Required:
I. Compute the net adjustment of the errors on 2019 profit.
II. Compute the net adjustment of the errors on 2020 profit.
III. Compute the net adjustment of the errors on the current assets at December 31, 2020.
IV. Compute the net adjustment of the errors on retained earnings at December 31, 2020.
Problem 4
The unaudited books of Toy Company showed the following information:
2019 2020
Profit 195,000 210,000
Inventory overstatement at year-end 36,000
Accrued expenses not recognized at year-end 40,000
Supplies inventory not recorded at year-end 15,000

Required: Compute for the following:

I. Correct profit in 2019
II. Correct profit in 2020

Problem 5
Boy, Inc. is a calendar year corporation whose financial statements for 2019 and 2020 included errors as follows:
Year Ending inventory Depreciation expense
2019 15,000 overstated 12,500 overstated
2020 5,000 understated 4,000 understated

Assume that purchases were recorded correctly and that no correcting entries were made in 2019 or in 2020.

Required: Ignoring income taxes, compute for the following:

I. Profit adjustment in 2019
II. Profit adjustment in 2020
III. Adjustment in retained earnings in 2020

Problem 6
Coy Company is planning an expansion of its current plant facilities. Coy is in the process of obtaining a loan at First
Bank. The bank has requested audited financial statements. Coy has never been audited before. It has prepared the
following comparative financial statements for the years ended December 31, 2020 and 2019:

Coy Company
Comparative Statement of Financial Position
December 31, 2020 and 2019

Assets 12/31/20 12/31/19

Current assets
Cash 407,500 205,000
Accounts receivable 980,000 740,000
Allowance for bad debts (92,500) (45,000)
Trading securities, at cost 195,000 195,000
Inventory 517,500 505,000
Total current assets 2,007,500 1,600,000
Property, plant and equipment 417,500 423,750
Less: accumulated depreciation (304,000) (266,000)
113,500 157,750
Total assets 2,121,000 1,757,750

Liabilities and Equity

Accounts payable 303,500 490,250
Equity
Ordinary share, 25 par, 30,000 shares authorized,
26,000 shares issued & outstanding 650,000 650,000
Retained earnings 1,167,500 617,500
Total equity 1,817,500 1,267,500
Total liabilities and equity 2,121,000 1,757,750

Coy Company
Statement of Comprehensive Income
For the Years Ended December 31, 2020 and 2019

2020 2019
Sales 2,500,000 2,250,000
Cost of Goods Sold (1,075,000) (987,500)
Gross Margin 1,425,000 1,262,500
Operating Expenses (875,000) (775,000)
Profit 550,000 487,500
The following facts were disclosed during the audit:
a. On January 2, 2019, Coy had charged a 5-year fire insurance premium to expenses. The total premium amounted to
15,500.

b. All trading securities were purchased in 2019. The entire portfolio was properly classified current and includes only
equity securities. The market valuation at the end of each year was as follows:
2020 – 202,500 2019 – 178,250

c. Beginning 2020, Coy estimated that an impairment of its accounts receivable amounted to 10% of its end-of-year
accounts receivable balance. No provision yet has been made for the year 2020.

d. The inventory account (maintained on a periodic basis) has been in error the last two years. The errors were as follows:
2019 ending inventory was overstated by 37,750
2010 ending inventory was overstated by 49,500

e. A machine costing 75,000 purchased on January 4, 2019 was incorrectly charged to operating expense. The machine
had a useful life of 10 years and a residual value of 12,500. The straight-line depreciation method is used by Coy.

Required: Show a computation of corrected profit for the years ended December 31, 2019 and 2020, assuming that any
adjustments are to be reported on the comparative statements for the two years. Ignore income taxes.

Problem 7
Soy Company has been using the accrual basis of accounting. However, an examination of the records reveals that some
expenses and revenues have been handled on a cash basis by the inexperienced bookkeeper of the company. The
statements of comprehensive income prepared by the bookkeeper reported 145,000 profit 2019 and 185,000 profit for
2020. Further review of the records reveals that the following items were handled improperly.
a. Rent of 6,500 was received from a lessee on December 23, 2019 and credited to income. This amount represents rent
for 2020.

b. Invoices for office supplies purchased were charged to expense accounts upon receipt. Inventories of supplies on hand
at the end of each year have been ignored and no adjusting entry has been made. Office supplies inventories at the end of
2018, 2019 and 2020 were 6,500; 3,700 and 7,100 respectively.

c. Salaries payable at the end of each year was consistently omitted from the records and were recorded as expense when
paid in the following year. Accrued salaries at the end of 2018, 2019 and 2020 were 5,500; 7,500 and 4,700 respectively.

Required: Compute for the following: I. Correct profit for 2019

II. Correct profit for 2020
Problem 8
Doy Corporation, a manufacturer of small tools, provided the following information from its accounts records for the year
ended December 31, 2020:
Inventory at December 31, 2020 (based on physical count of goods in Doy’s plant at cost) 1,750,000
Accounts payable at December 31, 2020 1,200,000
Net sales (sales less sales returns) 8,500,000

Additional information is as follows:

a. Included in the physical count were tools billed to a customer FOB shipping point on December 31, 2020. These tools
had a cost of 28,000 and were billed at 35,000. The shipment was on Doy’s loading dock waiting to be picked up by the
common carrier.

b. Goods were in transit from a vendor to Doy on December 31, 2020. The invoice cost was 50,000 and the goods were
shipped FOB shipping point on December 29, 2020.

c. Work in process inventory costing 20,000 was sent to an outside processor for plating on December 30, 2020.

d. Tools returned by customers and held pending inspection in the returned goods area on December 31, 2020 were not
included in the physical count. On January 8, 2021, the tools costing 26,000 were inspected and returned to inventory.
Credit memos totaling 40,000 were issued to the customers on the same date.

e. Tools shipped to a customer FOB destination on December 26, 2020 were in transit on December 31, 2020 and had a
cost of 25,000. Upon notification of receipt by the customer on January 2, 2021, Doy issued a sales invoice for 42,000.

f. Goods with an invoice cost of 30,000, received from a vendor at 5:00 pm on December 31, 2020, were recorded on a
receiving report dated January 2, 2021. The goods were not included in the physical count but the invoice was included in
accounts payable at December 31, 2020.
g. Goods received from a vendor on December 26, 2020 were included in the physical count. However, the related 60,000
vendor invoice was not included in accounts payable at December 31, 2020 because the accounts payable copy of the
receiving report was lost.

h. On January 3, 2021, a monthly freight bill in the amount of 4,000 was received. The bill specifically related to
merchandise purchased in December 2020, one-half of which was still in the inventory at December 31, 2020. The freight
changes were not included in either the inventory or in accounts payable at December 31, 2020.

Required:
I. Adjusted amount of Inventory on December 31, 2020
II. Adjusted amount of Accounts Payable on December 31, 2020
III. Adjusted amount of Net Sales on December 31, 2020

Problem 9
For three consecutive years, The Boy Company failed to recognize accruals, prepayments and other transactions in its
records. Reported net income and a listing of the errors appear below:
2018 2019 2020
Reported profit (loss) 490,000 670,000 (320,000)
a. Failed to record accrued expenses 34,000 28,000 43,000
b. Overstated ending inventories 63,000 28,000 36,000
c. Failed to record accrued interest on notes receivable 12,000 6,000 8,000
d. Failed to recognize unearned rent 24,000 20,000 18,000
e. Failed to record purchases on account, purchases were recorded
when paid in the subsequent year, merchandise properly included
in ending inventory 25,000 20,000
f. Repairs and maintenance incurred during the year capitalized
as part of asset cost. Full year depreciation at an annual rate of 10% is
provided in the year that the asset is recognized. 120,000 80,000
g. Failed to recognize prepaid insurance at year-end 4,800 6,200 7,800

Required: Prepare a schedule to correct the reported profit for each year.

2018 2019 2020

Reported profit (loss) 490,000 670,000 (320,000)
a. Failure to records accrued expenses
2018
2019
2020
b. Overstated ending inventory
2018
2019
2020
c. Failure to record accrued interest revenue
2018
2019
2020
d. Failure to recognize unearned rent
2018
2019
2020
e. Failure to record purchases on account
2018
2019
2020
f. Repairs expense erroneously capitalized
2018
2019
2020
g. Failure to recognize prepaid expense
2018
2019
2020
Correct profit