SVC REVIEW

Leganes, Iloilo and Ivisan, Capiz

FINANCIAL ACCOUNTING AND REPORTING

ERROR CORRECTION; SINGLE ENTRY;

HYPERINFLATION; CURRENT COST ACCOUNTING

ERROR CORRECTION

1. Regency Company reported net income for the years 2021 and 2022 at
P550,000 and P700,000 respectively. Your audit of the company’s accounts
disclosed the need for adjustments as follows:

2021 2022
Overstatement of ending inventory 29,000 33,000
Omission of depreciation on newly acquired equipment 15,000 15,000
Understatement of commission receivable 22,000 18,000
A purchase of merchandise was not recorded until the
following year, but included in the year’s inventory 60,000

The adjusted net income for 2022 was:

a. 700,000
b. 677,000
c. 708,000
d. 737,000

2. Bren Company’s beginning inventory at January 1, 2022 was understated by

P26,000 and its ending inventory was overstated by P52,000. As a result, Bren’s
cost of goods sold for 2022 was

a. 26,000 understated
b. 26,000 overstated
c. 78,000 understated
d. 78,000 overstated

3. Toronto Company failed to recognize accruals and prepayments during its first
year of operations. The earnings before tax, accruals and prepayments at the
end of the year are:

Earnings before tax 5,000,000

Items not recognized at year-end were as follows:

Prepaid insurance 200,000

Accrued wages 250,000
Rent revenue collected in advance 300,000
Interest receivable 100,000

The correct earnings before tax should be

a. 4,750,000
b. 5,250,000
c. 5,000,000
d. 4,950,000

4. Victoria company’s statements for 2021 and 2022 included errors as follows:

Ending inventory Depreciation

2021 200,000 understated 50,000 understated
2022 300,000 overstated 100,000 overstated

How much should retained earnings be retroactively adjusted at January 1,

2023?

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 a. 250,000 increase
b. 250,000 decrease
c. 400,000 decrease
d. 200,000 decrease

5. During 2022, Paul Company discovered that the ending inventories reported on
its financial statements were incorrect by the following amounts:

2020 60,000 understated

2021 75,000 overstated

Paul uses the periodic inventory system to ascertain year-end quantities that are
converted to peso amounts using the FIFO cost method. Prior to any
adjustments for these errors and ignoring income taxes, Paul’s retained earnings
at January 1, 2022 would be

a. Correct
b. 15,000 overstated
c. 75,000 overstated
d. 135,000 overstated

6. Canal Company reported the following net income:

2020 6,000,000
2021 6,500,000

In the determination of the net income, the following items are ignored:

2021 2022
Prepaid insurance 100,000 150,000
Accrued salaries 50,000 200,000
Unearned rental income 250,000 450,000
Accrued interest receivable 300,000 400,000

The correct net income for 2022 should be

a. 6,100,000
b. 6,300,000
c. 6,400,000
d. 6,500,000

7. Shannon Corporation began operations on January 1, 2021. Financial

statements for the years ended December 31, 2021 and 2022 contained the
following errors:

Ending inventory
Depreciation expense
Insurance expense
Prepaid insurance
2021 2022
160,000 understated 150,000 overstated
60,000 understated
100,000 overstated 100,000 understated
100,000 understated

In addition, on December 31, 2022, fully depreciated machinery was sold for
P108,000 cash, but the sale was not recorded until 2023. There were no other
errors during 2021 or 2022 and no corrections have been made for any of the
errors. Ignoring income taxes, what is the total effect of the errors on the amount
of working capital at December 31, 2022?

a. 42,000 overstated
b. 58,000 understated
c. 60,000 understated
d. 98,000 understated

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8. Glory Company manufactures kerosene heaters for home use. The company’s
December 31 financial statements contained the following errors:

2021 2022
Ending inventory 200,000 under 300,000 over
Depreciation 50,000 under

An insurance premium of P150,000 was prepaid in 2021 to cover 2021, 2022 and
2023. The entire amount was charged to expense in 2021. On December 31,
2022, fully depreciated machinery was sold for P250,000 cash but the sale was
not recorded until 2023. There were no other errors during 2021 and 2022, and
no corrections have been made for any of the errors.

Before any of the above errors were corrected, the company’s net income figures
for 2021 and 2022 were determined to be P6,500,000 and P8,000,000,
respectively. What is the correct net income for 2022?

a. 7,700,000
b. 7,450,000
c. 8,100,000
d. 7,650,000

SINGLE ENTRY

9. Trend Company provide the following information for the year 2022:

Net loss 100,000

Total assets at December 31 3,000,000
Ordinary share capital at December 31 1,000,000
Share premium 500,000
Dividend declared 700,000
The debt-to-equity ratio (liabilities + equity) is 50% at December 31, 2022. What
is the retained earnings account balance on January 1, 2022?

a. 1,100,000
b. 1,300,000
c. 500,000
d. 600,000

10. The following changes in account balances of Star Corporation during 2022 were
presented below.
Increase
Assets 800,000
Liabilities 200,000
Ordinary share capital 400,000
Share premium 100,000
Assuming there were no changes to retained earnings other than for a dividend
payment of P100,000, the net income for the year 2022 was
a. 600,000
b. 700,000
c. 200,000
d. 100,000

11. Presented below are changes in all the account balances of Camadillo Company
for the current year, except for retained earnings.
Increase
(Decrease)
Cash 790,000
Accounts receivable, net 240,000
Inventory 1,270,000
Investments (470,000)
Accounts payable (380,000)
Bonds payable 820,000
Ordinary share capital 1,250,000
Share premium 130,000

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 What was the net income for the current year, assuming that there are no entries
in the retained earnings account except for net income and a dividend
declaration of P190,000 which was paid in the current year?

a. 1,200,000
b. 1,190,000
c. 200,000
d. 10,000

12. Following data are selected information for Marbel Company for the current year:

Cash balance, January 1 130,000

Accounts receivable, January 1 190,000
Collections from customers 2,100,000
Stockholders’ equity, January 1 380,000
Total assets, January 1 750,000
Total assets, December 31 880,000
Cash balance, December 31 160,000
Accounts receivable, December 31 360,000
Total liabilities, December 31 390,000

The net income for the current year is

a. 490,000
b. 150,000
c. 110,000
d. 70,000

HYPERINFLATION

13. The following assets appear on the balance sheet of X Company:

Cash in bank 2,000,000

Accounts receivable 4,000,000
Inventory 1,500,000
Available for sale securities 500,000
Patent 1,000,000
Advances to employees 200,000
Advances to suppliers 400,000
Prepaid expenses 100,000

In preparing financial statements in a hyperinflationary economy, how much

should the company classify as monetary assets?

a. 6,200,000
b. 6,600,000
c. 6,700,000
d. 7,700,000

14. The following liabilities appear on the balance sheet of Y Company:

Accounts payable 1,000,000

Accrued expenses 500,000
Bonds payable 3,000,000
Finance lease liability 4,000,000
Unearned revenue 300,000
Advances from customers 1,200,000
Estimated warranty liability 200,000
Deferred tax liability 400,000

In preparing financial statements in a hyperinflationary economy, how much

should the company classify as monetary liabilities?

a. 4,500,000
b. 8,500,000
c. 9,700,000
d. 8,900,000

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15. Rubia Company showed the following information for purposes of preparing
hyperinflationary financial statements on December 31, 2022:

Note receivable (note was received on October 1, 2021) 2,400,000

Price index numbers:

October 1, 2021 80
January 1, 2022 100
December 31, 2022 400
Average for 2022 250

What is the fraction that should be used in restating the note receivable on
December 31, 2022?

a. 400/150
b. 400/250
c. 400/80
d. 400/400

16. Veranus Company operates in a hyperinflationary ecomony and provides the

following statement of financial position on December 31, 2022:

Property, plant and equipment 900,000

Inventory 2,700,000
Cash 350,000
Share capital issued 12/31/2018 400,000
Noncurrent liabilities 500,000
Current liabilities 700,000
Retained earnings 2,350,000

The general price index had moved on December 31 of each year as follows:
2018-100, 2019-130, 2020-150, 2021-240 and 2022-300.

The property, plant and equipment were purchased on December 31, 2020. The
noncurrent liabilities were loans raised on December 31, 2021. What is the
balance of retained earnings on December 31, 2022 after adjusting for
hyperinflation?

a. 2,350,000
b. 2,750,000
c. 3,550,000
d. 2,625,000

17. The following liabilities and equity relate to Maximus Company operating in a
hyperinflationary economy:

Before restatement After restatement

Liabilities 2,000,000 2,500,000
Share capital 5,000,000 8,500,000
Revaluation Surplus 1,000,000 ?
Retained earnings 1,500,000 ?
Total liabilities and equity 9,500,000 16,000,000

What would be the balances of revaluation surplus and retained earnings after
restatement?

Revaluation surplus Retained earnings

a. 0 5,000,000
b. 5,000,000 0
c. 1,000,000 4,000,000
d. 3,500,000 1,500,000

18. Camia Company provided the following information about the company’s
inventory during 2022:

Inventory – January 1 1,650,000

Purchases 5,400,000
Inventory – December 31 2,400,000

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 The relevant index numbers are:

January 1, 2022 110

December 31, 2022 370
Average index for 2022 240

What is the cost of goods sold in a hyperinflationary income statement?

a. 9,075,000
b. 3,468,750
c. 6,475,000
d. 2,250,000

19. M Company’s property, plant and equipment at December 31, 2022 were:

Year acquired Percent depreciated Cost Index number

2020 30 3,000,000 100
2021 20 2,000,000 125
2022 10 1,000,000 300

Depreciation is calculated at 10% straight line. A full year’s depreciation is

charged in the year of acquisition. There were no disposals in 2022. What
amount of depreciation would be included in the 2022 income statement adjusted
for hyperinflation?

a. 1,480,000
b. 1,800,000
c. 1,620,000
d. 600,000

20. C Company’s financial position did not change during 2022. The general price
index was 120 on January 1 and 300 on December 31, 2022. The statement of
financial position on January 1 and December 31, 2022 is:

Cash 250,000
Accounts receivable 500,000
Trading securities 400,000
Inventory 2,500,000
Land 1,350,000
5,000,000

Accounts payable 1,500,000

Mortgage payable 500,000
Share capital 2,500,000
Retained earnings 500,000
5,000,000

What is the purchasing power gain or loss for 2022?

a. 1,875,000 gain
b. 1,875,000 loss
c. 1,275,000 gain
d. 1,275,000 loss

21. The following information pertains to A Company for the year ended December
31, 2022.

Net monetary assets – January 1 880,000

Sales 3,900,000
Purchases 2,340,000
Expenses 975,000
Income tax 585,000
Cash dividend paid on December 31, 2022 200,000

The sales, purchases, expenses and income tax accrued evenly during the year.
Selected general price index numbers are:

January 1 110
December 31 280
Average for the year 195

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 What is the gain or loss on purchasing power during the year?

a. 1,360,000 gain
b. 1,360,000 loss
c. 200,000 gain
d. 200,000 loss

CURRENT COST ACCOUNTING

Nos. 22 and 23 are based on the following information:

Transaction regarding the land of Simple Company are summarized below:

a. The entity purchased land on January 1, 2022 for P500,000 cash. On

December 31, 2022, the land has a current replacement cost of P600,000.
b. On December 31, 2023, the land has a current replacement cost of
P750,000.
c. The entity sold the land for P1,000,000 cash on December 31, 2024. On this
date, the current replacement cost of the land is P800,000.

22. What is the realized holding gain to be reported in the 2024 income statement?

a. 300,000
b. 250,000
c. 50,000
d. 0

23. What is the gain on sale of land to be reported in 2024 under current cost
accounting?

a. 500,000
b. 250,000
c. 200,000
d. 150,000

24. Information with respect to Roundtree Company’s cost of goods sold for 2022 is:

Units Historical cost

Inventory – January 1 10,000 530,000
Purchases 45,000 2,790,000
Goods available for sale 55,000 3,320,000
Inventory – December 31 (15,000) ( 945,000)
Cost of goods sold 40,000 2,375,000

Roundtree estimates that the current cost per unit of inventory was P58 at
January 1, 2022 and P72 at December 31, 2022. In Roundtree’s income
statement restated to average current cost, the realized holding gain form the
inventory sold is

a. 225,000
b. 135,000
c. 350,000
d. 505,000

25. Kerr Company purchased a machine for P1,150,000 on January 1, 2022, the
entity’s first day of operation. At the end of the year, the current cost of the
machine was P1,250,000. The machine has no residual value, has a five-year
life, and is depreciated by the straight line method. For the year ended December
31, 2022, the amount of depreciation expense which would appear in the current
cost income statement is

a. 140,000
b. 230,000
c. 240,000
d. 250,000

End