ATENEO DE NAGA UNIVERSITY

PRACTICE PROBLEMS

Problem 1. The following errors were discovered in auditing the accounts of Mary Company:
2014 2013
a. Understatement of depreciation 4000 2000
b. Unrecorded purchases on account 8000 1000
c. Unrecorded sales on account 5000 3000
d. Understatement of ending inventory 9000 8000
e. Omission of unearned income 7000 2000
f. Omission of prepaid expense 1000 5000
g. Omission of accrued income 6000 4000
h. Omission of accrued expenses 2000 3000

Required:
16.What is the effect of the omission of prepaid expense and unearned income in 2013 and 2014 on the working
capital at the end of 2014?
a. 6,000 overstated b. 9,000 understated
c. 9,000 overstated d. 6,000 understated e. none of these

17.What is the effect of the omission of accrued expense, accrued income, prepaid expense, and unearned income at
the end of 2013 on the net income of 2014?
a. 5,000 overstated b. 4,000 understated
c. 9,000 overstated d. 4,000 overstated e. none of these

18.What is the effect of all the above errors on the net income of 2013?
a. 12,000 overstated b. 12,000 understated
c. 20,000 understated d. 20,000 overstated e. none of these

19.What is the net effect of all the above errors on the net income of 2014?
a. no effect b. 12,000 overstated
c. 12,000 understated d. 14,000 overstated e. none of these

20.What is the net effect of all the above errors on the net income of 2015?
a. none of the above b. 4,000 overstated
c. 12,000 overstated d. 20,000 understated e. none of these

PROBLEM 2
The income statement of KAREN Company for the years ended December 2015, 2016, and 2017
indicate the following net income;
2015- P170,000 2016- P205,000 2017- P186,000
An examination of the accounting records for these years indicates that several errors were made in
arriving at the net income amounts reported. The following errors were discovered:
a. Accrued salaries were consistently omitted from the records. The amounts omitted were:
2015- P10,000 2016- P14,000 2017- P 16,000
b. The merchandise inventory at December 31, 2016 was understated by P9,000 as the result of
errors made in the footings and extensions on the inventory sheets.
c. Unexpired insurance of P12,000 applicable to 2016 was expensed in 2015.
d. Interest receivable of P2,400 was not recorded on December 31, 2016.
e. On January 2, 2016, a piece of equipment costing P40,000 was sold for P18,000. At the date
of sale, the equipment had an accumulated depreciation of P24,000. The cash received was
recorded as income in 2016. In addition, depreciation was recorded for this equipment in
both 2016 and 2017 at the rate of 10% of cost.
1. The adjusted net income in 2015 is:
a. P 148,000 b. P 172,000 c. P 182,000 d. P 160,000
2. The adjusted net income in 2016 is:
a. P 188,400 b. P 186,000 c. P 184,400 d. P 179,400
3. The adjusted net income in 2017 is:
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a. P 185,600 b. P 175,000 c. P 168,600 d. P 176,600

PROBLEM 3
You were first appointed auditor of the Pringles Corporation in 2015. You completed the audit for
2015 and prepared audited financial statements directly from the audit working papers.
You have returned to make the 2016 audit and discovered that the client’s bookkeeper failed to
record the adjusting entries you made in 2015 audit working papers, which entailed adjustments for
the following items:

1. The December 31, 2015 inventory was understated by P5,000.

2. No entry was made for accrued utilities expense of P2,500 as of year end.
3. Ordinary motor repairs of P3,200 were charged to Accumulated Depreciation during 2015.
4. The Company failed to record the provision for uncollectible accounts in the amount of
P6,000.

Your examination of the 2016 entries in the accounts uncovered the following:
1. An expenditure of P10,000 for repairs of office equipment had been charged to Furniture
and Equipment. The Company records depreciation at 10% of the December 31 balance of
the Property and Equipment accounts.
2. A 2015 account receivable in the amount of P4,000 had been written off as uncollectible by
a charge to Retained Earnings.
3. Salesmen’s commission includes P2,400 paid on undelivered customers’ orders.
Additional data:
1. The audited statement of 2015 showed a net income of P250,000.
2. The unadjusted net income for 2016 is P320,000.
1. The unadjusted net income for the year 2015 is:
a. P 253,500 b. P 256,700 c. P 263,700 d. P 261,700

2. By how much would the December 31, 2016 retained earnings be misstated if no adjustments
were made for the above errors?
a. Retained earnings overstated by P11,800. c. Retained earnings overstated by P15,800.
b. Retained earnings overstated by P12,800. d. Retained earnings overstated by P16,800.

3. The adjusted net income for the year 2016 is:

a. P 315,900 b. P 308,400 c. P 314,900 d. P 310,900

PROBLEM 4
FOREST Company whose fiscal year ends on November 30, is in the process of negotiating a
loan for expansion purposes, and the bank has required audited financial statements. During the
course of the audit, the following additional information was obtained:

1. An account payable of P8,000 for merchandise purchased on November 23, 2015 was recorded
in December 2015. This merchandise was included in inventory at November 30, 2015.
2. Based on an aging of the accounts receivables as of November 30, 2015, it was estimated that
P40,000 of the receivable will become uncollectible. The allowances for bad debts has a credit
balance of P5,000.
3. A check for P1,800 from a customer to apply to his account was received on November 30,
2015 but was not recorded until December 2, 2015.
4. A P3,000 insurance premium paid on November 30, 2015, on a policy expiring one year later
was charged to Office Supplies.
5. On June 1, 2015, a production machine purchased for P24,000, was charged to Accumulated
Depreciation. Forest. Co. depreciates machines of this type on the straight line method over a
five-year life, with no salvage value.
6. Research and development costs of P150,000 were incurred in the development of a patent
which Forest expects to be granted during the fiscal year ending November 30, 2015. Forest
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initiated a five-year amortization of the P150,000 total cost during the fiscal year ended
November 30, 2015.

7. During December, 2015 a competitor company filed suit against Forest for patent infringement
claiming P300,000 in damages. At December 31, 2015, Forest’s legal counsel felt that the
likelihood of losing the lawsuit was possible but not probable. No Provision has been booked
for this lawsuit.
8. The November 30, 2014 inventory was understated by P16,000.
9. Income statement prepared by the client reflected an income of P450,000.
Based on the foregoing data, answer the following requirements.
1. The adjusted net income for the fiscal year ended November 30, 2015 should be:
a. P 266,200 b. P 265,600 c. P 300,600 d. P 268,600

2. What is the net effect of the above errors on the total assets at November 30, 2015?
a. Total assets overstated by P157,400. c. Total assets overstated by P133,400.
b. Total assets overstated by P141,400. d. Total assets overstated by P117,400.

PROBLEM 5
The partnership of King, Queen and Prince engaged you to audit its accounting records. Some
accounts are on the accrual basis and others are on the cash basis. The partnership’s books were
closed at December 31, 2015 by the bookkeeper who prepared the general ledger trial balance
that appears below.
King, Queen and Prince
GENERAL LEDGER TRIAL BALANCE
December 31, 2015
Debit Credit
Cash P 100,000
Accounts receivable 400,000
Inventory 260,000
Land 90,000
Buildings 500,000
Accumulated depreciation- buildings P 20,000
Equipment 560,000
Accumulated depreciation- equipment 60,000
Goodwill 50,000
Accounts payable 550,000
Allowance for future inventory losses 30,000
King, capital 600,000
Queen, capital 400,000
Prince, capital . 300,000
Totals P1,960,000 P1,960,000

Your inquiries disclosed the following:

1. The partnership was organized on January 1, 2014 with the partners making equal
amount of contributions. The initial partnership agreement calls for an equal distribution
of profit or loss among the partners. The partnership agreement was amended effective
January 1, 2015 to provide for the following profit and loss ratio: King, 50%; Queen,
30%; and Prince, 20%. The amended partnership agreement also stated that the
accounting records were to be maintained on the accrual basis and that any adjustments
necessary for 2014 should be allocated according to the 2014 distribution of profits.

2. The following amounts were not recorded:

December 31 2015 December 31
2014
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Prepaid insurance P7,000 P 6,500

Advances from customers 2,000 11,000
Accrued interest expense 4,500
The advances from customers were recorded as sales in the year the cash was received.

3. In 2015 the Partnership recorded a provision of P30,000 for anticipated declines in

inventory prices. You convinced the partners that the provision was unnecessary and
should be removed from the books.
4. The partnership charged equipment purchased for P44,000 on January 3, 2015 to
expense. This equipment has an estimated life of ten years and an estimated salvage value
of P4,000. The partnership depreciates its capitalized equipment under the straight-line
depreciation method.

5. The partners agreed to establish an allowance for doubtful accounts at two percent of
current accounts receivable and five percent of past due accounts. At December 31, 2014
the partnership had P540,000 of accounts receivable, of which only P40,000 was past
due. At December 31, 2015 fifteen percent of accounts receivable was past due, of which
P40,000 represented sales made in 2014, and was generally considered collectible. The
partnership had written off uncollectible accounts in the year the accounts became
worthless as follows:
Accounts Written Off in
2015 2014
2015 accounts P 8,000
2014 accounts 10,000 2,500

6. Goodwill was recorded on the books in 2015 and credited to the partners’ capital
accounts in the profit and loss ratio in recognition of an increase in the value of the
business resulting from improved sales volume.

7. No other capital transactions took place in 2014 and 2015.

8. Ignore tax implications.

Based on the above information, answer the following:

1. The net income of the partnership in 2015, before adjustment is:
a. P1,000,000 b. P980,000 c. P950,000 d. P920,000

2. The capital balance of King on January 1, 2015 before adjustment is:

a. P100,000 b. P125,000 c. P300,000 d. P600,000

3. The capital balance of Queen on December 31, 2015 before adjustment is:
a. P410,860 b. P374,140 c. P385,000 d. P400,000

4. What is the effect on 2015 net income of the omission of prepaid insurance, advances from
customers, and accrued interest expenses in 2014 and 2015?
a. P9,000 b. P9,000 overstated c. P5,000 d. P14,000
understated understated understated

5. What is the carrying value of equipment on December 31, 2015?

a. P600,000 b. P540,000 c. P544,000 d. P604,000

6. What should be the balance of the allowance for uncollectible accounts at December 31,
2015?
a. P9,800 b. P12,000 c. P15,800 d. P14,500

7. How much is the uncollectible account expense that should have been recognized in 2014?
a. P24,500 b. P14,500 c. P12,000 d. P9,500

8. The adjusted net income in 2015 is:

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a. P1,086,200 b. P1,027,200 c. P1,008,200 d. P1,036,200

9. What should be the capital balance of Prince at December 31, 2015?

a. P310,240 b. P300,240 c. P317,240 d. P307,240

10. What is the adjusted capital balance of Queen on January 1, 2015?

a. P107,000 b. P89,667 c. P93,000 d. P79,000

11. By how much would the 2014 net income be misstated, if no adjustments were made for the
above errors?
a. P31,000 b. P31,000 c. P21,000 d. P21,000
overstated understated overstated understated

12. The adjusted partners’ equity on December 31, 2015 is:

a. P1,315,200 b. P1,336,200 c. P1,306,200 d. P1,365,200