01 Problems

AUDITING PROBLEMS ACCOUNTING CHANGES & ERROR, CASH/ACCRUAL , SINGLE ENTRY
PROBLEM 1
Log Corp. reported pretax incomes of P4,545,000 and P3,483,000 for the years ended December 31, 2016
and 2017, respectively. Your audit however revealed the following errors:
a. Sales for 2016 included a P1,719,000 collection pertaining to a delivery made in January of 2017
under an FOB Shipping point freight term.
b. Inventory on December 31, 2016 was understated by P388,800 while inventory on December 31,
2017 was overstated by P255,000.
c. Interest expenses on Bonds for both years were recorded as payments were made every December
31. The bonds have a face value of P11,250,000 and pay a nominal interest rate of 6%. They were
issued at a discount of P675,000 on January 1, 2015 to yield an effective interest rate of 7%.
d. Ordinary repairs to equipment had been charged to the Equipment account during 2016 to 2017.
Repairs of P382,500 and P423,000 had been incurred in 2016 and 2017, respectively. In determining
depreciation charges, Log uses the double declining balance method over 10 a ten-year asset useful
life. The rate is being applied to the balance of the asset account at the end of each year.
1. What is the adjusted pretax income for 2016?
2. What is the adjusted pretax income for 2017?
PROBLEM 2
The following information pertains to Lot Inc.'s depreciable assets:
a. Equipment XYZ was acquired on January 2020 by exchanging an old delivery van originally costing
P225,000 but with a carrying value on the same date at P75,000. The new equipment had cash
purchase price of P450,000 while the old equipment had a market value of P50,000, The company
paid P400,000 on the trade in, which the company had debited to the Equipment account, the only
entry made by the client related to the trade in transaction, The equipment had been depreciated
over its 10 year useful life using the straight-line method. On January 3, 2017, it had been
ascertained that the equipment had 5 years remaining useful life.
b. Equipment UVW cost P393,750 and was acquired on January 1, 2015. On the date of acquisition, the
expected useful life was 12 years with no residual value. The straight-line depreciation method was
used. On January 2, 2017, it was estimated that the remaining life of the asset would be 6 years and
that there would be an P18,750 residual value. In addition, 150% declining balance method will be
used to fairly reflect the mode of use of the asset.
c. A building was purchased on January 3, 2020, for P4,500,000. The building was expected to have a
useful life of 20 years with no residual value. The straight-line depreciation method was used. On
January 1, 2017, a change was made to the sum-of-years' digits method of depreciation. Total life of
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the asset was estimated to be at 15 years with P50,000 residual value.
3. How much is the adjustment to the accumulated depreciation account and the related depreciation
expense for the current year for the Equipment XYZ?
a. 15,000 and 63,000
b. 135,000 and 63,000
c. 165,000 and 56,000
d. 135,000 and 56,000
4. How much is the depreciation expense for the current year for the Equipment UVW?
5. What is the book value of the building at December 31, 2017?
PROBLEM 3
In the course of your examination of the December 31, 2017, financial statements of Insular Corp, you
discovered certain errors that had occurred during 2016 and 2017. No errors were corrected during 2016.
The errors are summarized below:
a. Beginning merchandise inventory (January 1. 2016 was understated by P259,200.
b. Merchandise costing P72,000 was sold for P120,000 to Naval Company on December 28, 2016, but
the sale was recorded in 2017. The merchandise was shipped FOB shipping point and was not
included in ending inventory. Insular uses the periodic inventory system.
c. A two-year fire insurance policy was purchased on May 1, 2016, for P172,800. The whole amount
was charged to Prepaid Insurance. No adjusting entry was prepared in 2016 and 2017.
d. A one-year note receivable of P288,000 was held by Insular beginning October 1, 2016. Payment of
the 10% note and accrued interest was received upon maturity. No adjusting entry was made on
December 31, 2016.
e. Equipment with a 10-year useful life was purchased on January 1, 2016, for P1,176,000. No
depreciation expense was recorded during 2016 or 2017. Assume that the equipment has no
residual value and that Insular uses the straight-line method for recording depreciation.
f. The company reported a P1,500,000 net income in 2016 and a P1,750,000 net income in 2017.
6. What is the net adjustment to the beginning retained earnings account in 2017?
7. What is the adjusted balance of the net income in 2017?
PROBLEM 4
You were engaged by Kuting Corp. to audit its financial statements for the first time. In examining the
company's books, you discovered that certain adjustments had been overlooked at the end of 2016 and
2017. Moreover, you also discovered that other items had been erroneously recorded. The said omissions
and other failures for each year are noted below:
2016 2017
Prepaid insurance 256,000 205,200
Accrued salaries and wages 582,400 520,000
Accrued interest income 172,800 142,000
Advances from customers 313,600 374,000
Capital expenditures charged as repairs expense 376,000 348,000
Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized as
advances from customers because goods were not shipped until the following year.
b. Capital expenditures had been recorded as repairs but should have been charged to the Machinery
account; the depreciation rate is 10% per year, but depreciation in the year of expenditures is to be
recognized at 5%.
Based on the above and the result of your audit, answer the following:
8. What is the total effect of the errors on the 2017 net income?
a. Understated by 251,000
b. Overstated by 216,200
c. Understated by 213,400
d. Overstated by 253,800
9. What is the total effect of the errors on the company's working capital as of December 31, 2017?
10. If remained unadjusted, what will be the effect of the errors to the company's December 31, 2017
accumulated profits?
PROBLEM 5
The income statements of ROXAS INC. indicate the following net income:
2015 P1,500,000
2016 1,750,000
2017 2,000,000
An examination of the accounting records for the year ended December 31, 2017 indicates that several
errors were made. The following errors were discovered:
a. Salary accruals on December 31, were consistently omitted:

2014 Php 95,000
2015 110,000
2016 100,000
2017 140,000
b. The footings and extensions showed that the inventory on December 31, 2016 was overstated by
P190,000.
c. P150,000 worth of inventories were received on January 4, 2018. Upon investigation you discovered
that these goods were shipped by the supplier on December 30, 2017 FOB Shipping point. Further
investigation revealed that liability on the item were recorded when the goods were received.
d. Prepaid insurance were consistently omitted at the end of each year:

2014 Php 75,000
2015 100,000
2016 115,000
2017 120,000
e. Interest receivable was not recorded on December 31 of the following years:

2015 Php 20,000
2016 25.000
2017 30,000
f. On January 1, 2017 an equipment costing P400,000 was sold for P220,000. At the date of sale the
equipment had accumulated depreciation of P240,000. The cash received was recorded by the
company as miscellaneous income.
g. You also discovered that on July 1, 2015, the company completed the construction of the left wing of
its factory building incurring a total cost of P750,000, which it had charged to repairs expense. The
said building has been used in operations for 5 years as of July 1, 2015 and its life was unaffected by
the extension. The building which had an original cost of P3,000,000 had an accumulated
depreciation of P1,125,000 as of December 31, 2017.
11. What is the correct depreciation expense in 2017?
12. What is the correct net income in 2015?
PROBLEM 6
You are performing, for the first time, the audit for the year ended December 31, 2017 of GKNB CORP.
financial statements. The company reported the following amounts of net income for the years ended
December 31, 2015, 2016 and 2017:
2015 Php 381,000

2016 450,000
2017 385,500
During your examination, you discovered the following errors:
a. You observed that there were errors in the physical count: December 31, 2016 inventories were
understated by P42,000 and December 31, 2017 were overstated by P69,000.
b. On December 30, 2017, GKNB recorded on account, merchandise in transit which cost P45,000. The
merchandise was shipped FOB Destination and had not arrived by December 31. The merchandise
was not included in the ending inventory.
c. Accrual sales at each year end were consistently omitted as follows:

2015 Php 12,000
2016 15,000
2017 10,500
d. Accrual of salaries were also consistently omitted as follows:

December 31, 2015 30,000
December 31, 2016 42,000
e. On March 5, 2016, a 10% stock dividend was declared and distributed. The par value of the shares
amounted to P30,000 and market value was P39,000. The stock dividend was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
f. On July 1, 2016, GKNB paid a three-year rent. The three-year premium of P18,000 was paid on that
date, and the entire premium was recorded as insurance expense.
g. On January 1, 2017, GKNB retired bonds with a book value of P360,000 for P318,000. The gain was
deferred and amortized over 10 years as a reduction of interest expense on other outstanding
bonds.
18. What is the retroactive adjustment to the beginning retained earnings in 2017 to correct the prior years'
errors?
a. 21,000 cr.
b. 21,000 dr.
c. 69,000 dr.
d. 69,000 cr.
19. What is the adjusting entry in 2017 to correct the error in item e above?
a. Accumulated profits 39,000
Share premium 9,000
b. Accumulated profits 30,000

Accumulated profits 30,000
c. Accumulated profits 9,000

Share premium 9,000
d. No adjustment is necessary
PROBLEM 7
You are auditing the financial statements of WWEE Company. The company's accountant provided you with
the following comparative statements of income and accumulated profits for the years 2018 and 2017:
2018 2017
Sales 6,000,000 4,500,000
Cost of goods sold (2,800,000) (2,400,000)
Gross income 3,200,000 2,100,000
Operating expenses (1,500,000) (1,800,000)
Net profit 1,700,000 300,000
Accumulated profits, beg 1,150,000 1,000,000
Net profit 1,700,000 300,000
Dividends paid (500,000) (150,000)
Accumulated profits, end 2,350,000 1,150,000
a. The management, with your concurrence, opined that changing the company's inventory costing from
FIFO to Weighted Average is justified as it will present a more relevant and reliable financial information
given the prevailing current circumstance. The following summarizes the inventory costs at year end
under both methods:
2018 2017
FIFO 625,000 727,500
Weighted Average 715,000 827,500
b. The company decided to change its method of depreciation from the double declining balance method
to the straight line. The depreciable assets had a 10-year useful life and have been depreciated for five
years at the end of 2017. The salvage value of the said assets was estimated to be P50,000. Expenses in
the income statements included P350,000 and P437,500 depreciation expenses in 2018 and 2017,
respectively, computed based on double declining balance method.
c. On August 31, 2017, the company started the construction of a building it plans to use as a second
factory. As of the current balance sheet date, the construction is yet to be done. Total accumulated costs
incurred on the construction and recorded in its Construction-in progress account, amounted to
P1,250,000, which included a P25,000 capitalized borrowing cost in 2017, since the company opted to
apply the alternative approach of accounting for finance costs in accordance with PAS 23. During the
current year, the company decided to change method of accounting for borrowing costs to follow the
benchmark treatment. Actual borrowing cost in 2018 amounted to P75,000 it charged to current
operations.
20. What is the restated net income in 2017 to be presented in the comparative income statements?
22. What is the adjusted accumulated profits balance at the beginning of 2018?
23. What is the adjusted accumulated profits at the end of 2018?
24. What is the necessary adjusting entry a result of the change described in item c?
a. No adjustment necessary
b. Interest expense 25,000

Retained earnings 25,000
c. Interest expense 25,000

Construction in progress 25,000
d. Construction in progress 75,000

Interest expense 75,000
e. Retained earnings 25,000

Construction in progress 25,000
PROBLEM 8
Kris Company presented to you the following income statement in line with the same company's audit of the
financial statements:
KRIS COMPANY
INCOME STATEMENT
For the Year Ended December 31, 2017
Sales P10,350,000
Cost of Goods Sold 7,050,000
Gross Profit P3,300,000
Operating expenses:
Selling P675,000
Administrative 1,050,000 1,725,000
Net Income P1,575,000
Your audit disclosed the following information:

• Accounts receivable decreased P540,000 during the year.
• Prepaid expenses increased P255,000 during the year.
• Accounts payable to suppliers of merchandise decreased P412,500 during the year.
• Accrued expenses payable decreased P150,000 during the year.
• Administrative expenses include depreciation expense of P90,000.
• Inventories decreased by P450,000.
25. What is the total amount of cash received form customers during the year?
26. What is the total amount of cash paid to suppliers during the year?
27. What is the total amount of cash paid for operating expenses during the year?
28. What is the net amount of cash provided by operating activities?
PROBLEM 9
PORTER COMPANY is in its first year of operation and is using the cash basis of accounting. The company
presented the following cash receipts and disbursement records for 2017:
Cash receipts Php 384,000
Cash disbursements (247,500)
Php 136,500
The management requested you to compute its income under accrual basis. The following information are
deemed relevant in your analysis:
a. Depreciation of plant assets for 2017 computed by the straight-line method is P31,500.
b. Prepaid insurance of P5,400, two-thirds of which relates to 2018, is included in the 2017 cash
disbursement figure. This amount was recognized as insurance expense when it was paid.
c. Porter Company received P36,000 in advance rent for space in its building. The entire amount is
included in the cash receipts figure and was recognized as rent revenue when received. However,
P21,000 of it was for space that will be provided in 2018.
d. Employees are due P8,400 at the end of 2017.
e. Interest amounting to P9,510 from investments is receivable at the end of 2017.
f. You estimate that your 2017 fee for accounting services that have not been billed will be P1,500.
29. What is the correct net income under the accrual basis of accounting?
30. What are the total liabilities to be reported as of the balance sheet date under the accrual basis?
PROBLEM 10
You are auditing the financial statements of UKG INC. for the year ended December 31, 2017. The company
maintains its books on a semi-accrual and semi-cash basis. Purchases and sales are recognized on an accrual
basis while other operating expenses are kept on cash basis. The company bookkeeper presented to you a
draft of its income statements for the year under audit:
Sales Php 600,000

Cost of sales 360,000
Gross profit Php 240,000
Depreciation expense (29,000)
Other expenses (166,000)
Interest expense (20,000)
Net income Php 25,000
Your investigation revealed the following information:
a. On January 1, 2017, UKG issued P200,000, 10%, 10 year bonds when the market rate of interest was
8%. Interest is payable on June 30 and December 31.
b. All purchases of inventory are on account and other expenses reflect those expenses paid in cash
during the period.
c. The company had open invoice (unpaid invoices) from suppliers amounting to P120,000 on
December 31, 2017 and P116,000 on January 1, 2017.
d. The company had outstanding invoices (uncollected invoices) to customers amounting to P96,000 on
January 1, 2017 and P110,000 on December 31, 2017.
e. Inventory taking at the end of each year revealed that inventory on hand on December 31, 2016
amounted to 186,000 while inventory on December 31, 2017 was at P174,000.
f. Accrued utilities at the beginning and at the end of the year amounted to P5,000 and 7,000,
respectively while prepaid rentals at the beginning and at the end of the year amounted to P10,000
and 14,000, respectively.
Based on the information available and as a result of your audit, determine the following:
31. How much was paid for inventory purchases?
32. How much was received from customers in 2017?
33. What is the carrying value of the bonds payable on December 31, 2017?
34. What is the correct interest expense in 2017?
PROBLEM 11
You were able to gather the following in connection with our audit of the Wowie Corp. for the year ended
December 31, 2017:
December 31, 2016 December 31, 2017

Accounts receivable Php 6,400,000 Php 4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000

Advertising supplies inventory 35,000 75,000
Accrued advertising expense 14,250 40,000
Prepaid insurance 25,000 0
Unexpired insurance 0 41,000
During the year:

• Amount collected from customers, P10,000,000
• Total payments to suppliers of merchandise, P13,618,000
• Total payments to suppliers of merchandise of prior years, P4,632,000
• Wages paid, P3,050,000
• Advertising paid which includes, P300,000
• Insurance premium paid, P125,000
36. Total sales for 2017 under accrual basis
37. Total purchases for 2017 under accrual basis
38. Accrual wages expense for 2017
39. Accrual advertising expense in 2017
40. Accrual insurance expense in 2017
PROBLEM 12
The December 31 year-end FS of ONE PIECE CO. contained the following errors:
December 31, 2017 December 31, 2018
Ending Inventory 48,000 Understated 40,500 Overstated
Depreciation expense 11,500 Understated 0
An insurance premium of P330, 000 was paid in advance in 2017 covering the years 2017, 2018 and 2019.
The entire amount was charged to expense in 2017. In addition, on December 31, 2018, fully depreciated
machinery was sold for P75, 000 cash but the sale was not recorded until 2019. There were no other errors
during 2017 and 2018, and no corrections have been made for any of the errors. Ignore income tax effects.
41. What is the total effect of the errors on Sam's 2018 net income?
a. 256,500 Understatement
b. 123,500 Overstatement
c. 144,500 Understatement
d. 133,000 Understatement
42. What is the total effect of the errors on Sam's working capital at Dec. 31, 2018?
43. What is the total effect of the errors on Sam's RE at Dec. 31, 2018?
PROBLEM 13
KUROKO CO. decided on January 2, 2018, to change the depreciation method of its equipment from sum of
the year's digits to straight line method of depreciation. Said equipment was purchased on January 1, 2008
for Php1,150,000, total life of 15 years and a Php50,000 residual value. As of January 2, 2018, the residual
value remains at Php50,000, but with a revised remaining useful life of 10 years.
44. The depreciation expense for the current year is:
45. The carrying value of the equipment as of December 31, 2018 is:
PROBLEM 14
SABLAY CORP. uses the cash basis of accounting. Sablay collected P1,400,000 from its customers during the
year. Balances of certain accounts follow:
Beginning Balances Ending Balances

Accounts Receivable 100,000 180,000
Allowance for bad debt 40 000 50,000
46. What is the Sales Revenue under the accrual basis of accounting assuming the company wrote-off
P30,000 of its accounts during the year and subsequently recovered P10,000 of these later during the
year?
PROBLEM 15
Han Company uses the cash basis of accounting. The company made P1,000,000 in payments to its suppliers
during the year. Balances of certain accounts follow:

Inventory 40,000 70,000
Accounts Payable 100 000 140,000
47. How much is the total purchases for the year under the accrual basis of accounting?
48. How much is the amount of the cost of goods sold for the year?
PROBLEM 16
Under the accrual basis, rental income of Freedom Company for the calendar year 2018 is P1,200,000.
Balances of certain accounts follow:

Unearned rental income 100,000 150,000
Accrued rental income 60,000 80,000
49. How much is the total rental income under the cash basis of accounting?
PROBLEM 17
SUNSHINE CO. pays advance royalties to certain enterprises. For other enterprises, Sunshine pays royalties
within 90 days after year-end. During 2018 Sunshine remitted P900,000 of royalties. Balances of certain
accounts follow:

Prepaid royalties P165,000 P135,000
Royalties payable 240,000 225,000
50. In its income statement for the year ended December 31, 2018, Sunshine should report royalty expense
of:
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Remember Christ’s unfailing love, and trust His faithful, tender care. – Sper
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Auditing Problems ACTG 11
JDTA AP-02 Cash/Accrual, Single Entry
AUDITING PROBLEMS ADAYO/TADIAR

CASH/ ACCRUAL, SINGLE ENTRY
PROBLEM 1: The selected balance sheet information for the MG Company at November 30 and December 31,
2011, is presented below. The company uses the perpetual inventory system and all sales to customer were
made on credit.
November 30 December 31
Debit Credit Debit Credit
Accounts receivable P10,000 P 3,000
Inventory 7,000 6,000
Accounts payable 12,000 15,000
Wages payable 5,000 3,000
The following cash flow information is also available:
a. Cash collected from credit customers amounted to P 80,000
b. Cash paid for insurance amounted to P5,000
c. Cash paid to suppliers of inventories amounted to P60,000. The accounts payable account
pertains to purchase of inventories
d. Cash paid to employees for salaries amounted to P10,000
Required: Determine the following, under the accrual basis

A B C D
1. Sales Revenue 73,000 80,000 83,000 87,000
2. Cost of sales 60,000 63,000 64,000 66,000
3. Insurance expense 2,500 5,000 7,500 10,000
4. Wage expense 3,000 5,000 8,000 10,000
PROBLEM 1: The Revolutionary Corporation began operation in 2011. The company purchases computer
equipment from manufacturers and then sells to retail stores. During 2011, the bookkeeper used a check
register to record all cash receipts and cash disbursements. No other journals were used. The following is a
recap of the cash receipts and disbursements made during the year.
Cash receipts:
Sale of share capital P 50,000
Collections from customers 320,000
Borrowed from a local bank on April 1,
note signed requiring principal and interest
at 12% to be paid on March 31, 2012 40,000
Total cash receipts P 410,000
Cash disbursements:
Purchase merchandise P 220,000
Payment of salaries 80,000
Purchase of equipment 30,000
Purchase of rent on building 14,000
Miscellaneous expense 10,000
Total cash disbursements P 354,000
You are called in to prepare the financial statements at December 31, 2011. The following additional
information were provided to you:
a. Customers owed the Company P22,000 at year end. Of this amount, it was anticipated that
P3,000 would probably not be collected. There were no actual bad debt write-offs in 2011.
b. At year end, P30,000 was still due to suppliers costing P50,000 still remained on hand
c. At year end, merchandise inventory costing P50,000 still remained on hand
d. Salaries owed to employees at year-end amounted to P5,000.
e. On December 1, P3,000 in rent was paid to the owner of the building used by Revolutionary. This
represented rent for the months of December through February.
f. The equipment, which has a 10-year life and no salvage value, was purchased on January 1, 2011.
Straight line depreciation is used.
Requirements: Determine the adjusted balances of the following:
A B C D
1. Sales Revenue 320,000 339,000 342,000 345,000
2. Cost of Sales 200,00 220,000 250,000 270,000
3. Salaries expense 75,000 80,000 85,000 90,000
4. Rent expense 9,000 12,000 15,000 16,000
5. Net income 32,000 29,000 25,400 24,400
6. Total current Assets 130,000 127,000 125,000 120,000
7. Total noncurrent assets 30,000 28,000 27,000 24,000
8. Total current liabilities 38,600 70,000 75,000 78,600
9. Total noncurrent liabilities -0- 3,600 40,000 43,600
Page 1 of 3 AP-02
PROBLEM 3: George Laundry Company is in retailing laundry supplies. The company kept very limited
records and most of the company’s transactions are summarized in cash records. George Laundry Company
presented you the following information, in line with your audit:
Total cash receipt from customer, based on cash records P 576,000
Proceeds from a bank loan (note payable-non trade) 100,000
Total cash payments to suppliers, based on cash records 299,000
Total cash payments for other operating expenses 144,000
Credit memos issued, for returns and allowances 50,000
Total refund for goods received as returns, based on cash records 25,000
Sales discount 40,000
Credit memos received, for returns 45,000
Total refund for goods returned to suppliers, based on cash records 15,000
Purchase discounts 30,000
Further investigation revealed the following:

Decrease in accounts receivable P 150,000
Increase in accounts payable 200,000
Increase in notes receivable 50,000
Increase in notes payable-trade and non trade 10,000
Accounts written off during the year 25,000
Cash recovered from previous write-offs 5,000
Increase in merchandise inventory 131,000
Required:
1. What is the accrual basis gross sales?
a. 561,000 c. 586,000
b. 566,000 d. 591,000
2. What is the accrual basis gross purchases?
a. 584,000 c. 484,000
b. 499,000 d. 114,000
3. What is the correct net sales?
a. 501,000 c. 476,000
b. 496,000 d. 471,000
4. What is the correct cost of sales?
a. 107,000 c. 278,000
b. 263,000 d. 363,000
5. What is the correct gross profit?
a. 208,000 c. 218,000
b. 213,000 d. 233,000
PROBLEM 4: Your audit of Edu Company revealed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The company’s
collections were deposited weekly. No record was kept of cash in the bank, nor was a record kept of sales.
Accounts receivable were recorded only by keeping copy of tickets, and these copies were given to the
customers when paying their accounts.
The company started its operations on January 2, 2006 and issue common stock, 216,000 shares with P100
par, for the following considerations:
Cash P 1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000
An analysis of the bank statements showed total deposits, including original cash investment, of P12, 600,000.
The balance in the bank statement on December 31, 2006, was P900,000, but there were checks amounting to
P 180,000 dated in December dated in December but not paid by the bank until January 2007. Cash on hand
on December 31, 2006 was P450,000 including customers’ deposit of P135,000
During the year, Edu borrowed P 1,800,000 from the bank and repaid P 450,000 and P90,000 interest.
Disbursements paid in cash during the year were as follows: Utilities, P360,000; Salaries, P360,000; Supplies,
P720,000, and Dividends, P540,000
An inventory of merchandise taken on December 31, 2006 showed P 2,718,000 of merchandise.
Ticket for accounts receivable totaled P 3,240,000 but P180,00 of that amount may prove uncollectible.
Unpaid supplier invoices for merchandise amounted to P1,260,000
Equipment with a cash price of P1,440,000 was purchased in early January on one-year installment basis.
During the year, checks for the down payment and all maturing installments totaled P 1,602,000. The
equipment has a useful life of 5 years.
Page 2 of 3 AP-02
Based on the above and the result of your audit, determine the following:
1. Payments for merchandise purchases

a. 9,378,000 c. 7,308,000
b. 7,758,000 d. 7,938,000
2. Collections from customers in 2006
a. 12,960,000 c. 11,430,000
b. 14,760,000 d. 11,295,000
3. Total sales in accrual basis in 2006
a. 11,295,000 c. 14,535,000
b. 11,430,000 d. 14,670,000
4. Total purchases on accrual basis in 2006
a. 10,998,000 c. 9,738,000
b. 10,818,000 d. 9,558,000
5. Cost of goods sold in 2006
a. 6,840,000 c. 8,100,000
b. 7,020,000 d. 8,280,000
6. Net income for the year ended December 31, 2006
a. 4,860,000 c. 5,310,000
b. 3,015,000 d. 4,680,000
Page 3 of 3 AP-02
SUMMIT PROFESSIONAL REVIEW CENTER
Room 2 3/F ABE International College of Business and Accountancy-Tacloban
Avenida Veteranos Street, Tacloban City
Mobile No: 09157251003
Email: summitprofreview2016@gmail.com
FB: Summit Professional Review Center
AUDITING-PROBLEMS
Accounting Changes and Correction of Errors
Prior Period Errors - The entity shall correct prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery by restating the net income and retained
earnings of prior period.
Two types of prior period errors:
1. Counterbalancing errors
a. errors that affect both the net income of the year when the error was committed and the
immediate year thereafter in opposite directions.
b. affect pertinent real accounts only in the year of commission of error. Real accounts
subsequent to the year of error are already correctly stated.
Examples of counterbalancing errors:

a. Omission of Accrued Expenses
b. Omission of Unearned Income
c. Omission of Accounts Payable/Purchases
d. Omission of Prepaid Expenses
e. Omission of Accrued Income
f. Omission of Accounts Receivables/Sales
g. Understatement of Ending Inventories
h. Overstatement of Ending Inventories
2. Non-counterbalancing Errors
A. errors that affect only the net income of the year the error was committed. The net income
of the subsequent year is already correctly stated.
B. affect pertinent real accounts in the year the error was committed and all the subsequent
years, unless adjusted.
Problem 1:
The income statements of Christia Inc. indicate the following net income:
2013 P1,500,000
2014 1,750,000
2015 2,000,000
An examination of the accounting records for the year ended December 31, 2015 indicates that
several errors were made. The following errors were discovered:
a. Salary accruals on December 31 were consistently omitted:

2012 P95,000
2013 110,000
2014 100,000
2015 140,000
b. The footings and extensions showed that the inventory on December 31, 2014 was overstated by
P190,000.
1|Summit Professional Review Center Auditing-Problems

c. P150, 000 worth of inventories were received on January 4, 2015. Upon investigation you
discovered that these goods were shipped by the supplier on December 30, 2015 FOB shipping
Point. Further investigation revealed that liability on the item were recorded when the goods were
received.
d. Prepaid insurance were consistently omitted at the end of each year:

2012 P75,000
2013 100,000
2014 115,000
2015 120,000
e. Interest receivable was not recorded on December 31 of the following years:

2013 P20,000
2014 25,000
2015 30,000
f. On January 1, 2015 an equipment costing P400,000 was sold for 220,000. At the date of sale the
equipment had accumulated depreciation 240,000. The cash received was recorded by the company
as miscellaneous income.
g. You also discovered that on July 1, 2013, the company completed the construction of the left wing
of its factory building incurring a total cost of P750,000, which it had charged to repairs expense. The
said building has been used in operations for 5 years as of July 1, 2013 and its life was unaffected by
the extension. The building which had an origin cost P3,000,000 had an accumulated depreciation of
P1,125,000 as of December 31, 2015.
Required:
1. What is the correct depreciation expense in 2015?
a. 150,000 c. 200,000
b. 175,000 d. 187,500
a. 2,365,000 c. 2,255,000
b. 2,235,000 d. 2,230,000
a. 1,540,000 c. 1,640,000
b. 1,590,000 d. 1,690,000
a. 2,100,000 c. 2,050,000
b. 2,000,000 d. 1,950,000
Problem 2:
You are performing for the first time the audit for the year ended December 31, 2014 of ABC Corp.
financial statements. The company reported the following amounts of net income for the years ended
December 31, 2012, 2013, 2014.
2012 P381,000
2013 450,000
2014 385,500
During your examination, you discovered the following errors:
a. You observed that there were errors in the physical count: December 31,2013 inventories were
understated by P 42,000 and December 31,2014 were overstated by P 69,000.
b. On December 30, 2014, GKNB recorded on account, merchandise in transit which cost P45,000.
The merchandise was shipped FOB Destination and had not arrived by December 31. The
merchandise was not included in the ending inventory.

c. Accrual sales at each year end were consistently omitted as follows:
2012 P12,000
2013 15,000
2014 10,500
d. Accrual of salaries were also consistently omitted as follows:

December 31,2012 30,000
December 31,2013 42,000
e. On March 5,2013 a 10% stock dividend was declared and distributed. The par value of the
shares amounted to 30,000 and market value was 39,000. The stock dividend was recorded as
follows:
Ordinary shares 30,000
f. On July 1,2013 ABC paid three-year rent. The three-year premium of 18,000 was paid on that
date, and the entire premium was recorded as insurance expense.
g. On July 1,2014, ABC retired bonds with book value of P360,000 for P318,000. The gain was
deferred and amortized over 10 years as a reduction of interest expense on other outstanding
bonds.

a. 399,000 b. 363,000 c. 351,000 d. 339,000

a. 477,000 b. 498,000 c. 528,000 d. 534,000

a. 313,200 b. 388,800 c. 393,000 d. 418,800
8. What is the retroactive adjustment to the beginning retained earnings in 2014 to correct the
prior years’ errors?
a. 21,000 cr. b. 21,000 dr. c. 69,000 dr. d. 69,000 cr.
9. What is the adjusting entry in 2014 to correct the error in item e above?
a. Accumulated profits 39,000
Share premium 9,000
b. Accumulated profits 30,000

Accumulated profits 30,000
c. Accumulated profits 9,000

Share premium 9,000
d. no adjustment necessary
Problem 3:
You were engaged by Ken Corp. to audit its financial statements for the first time. In examining the
company's books, you discovered that other items had been erroneously recorded. The omissions
and other failures for each year are noted below:
2014 2015
Accrued salaries and wages 592,400 510,000
Accrued interest income 180,200 152,000
Advances from customers 330,600 380,000
Capital expenditures charged as repairs expense 350,000 370,000
Audit notes:
a. Collection from customers had been recorded as sales but should have been recognized as
advances from customers because goods were not shipped until the following year.
b. Capital expenditures had been recorded as repairs but should have been charged to the
machinery account; the depreciation is 10% per year, but depreciation in the year of
expenditure is to be recognized at 5%.
Based on the above and the result of your audit, answer the following:
10. What is the total effect of the errors on the 2015 net income?
a. Understated by 300,000 c. Understated by 316,500

b. Overstated by 335,000 d. Overstated by 353,800
11. What is the total effect of the errors on the company's working capital?
12. If remained unadjusted, what will be the effect of the errors to the company's December 31, 2015
accumulated profits?
“Life is really simple, but we insist on making it complicated.”
Confucius

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AUDITING PROBLEMS ACCOUNTING CHANGES & ERROR, CASH/ACCRUAL , SINGLE ENTRY

1. What is the adjusted pretax income for 2016?

2. What is the adjusted pretax income for 2017?

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the asset was estimated to be at 15 years with P50,000 residual value.

5. What is the book value of the building at December 31, 2017?

a. Beginning merchandise inventory (January 1. 2016 was understated by P259,200.

7. What is the adjusted balance of the net income in 2017?

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a. Salary accruals on December 31, were consistently omitted:

d. Prepaid insurance were consistently omitted at the end of each year:

e. Interest receivable was not recorded on December 31 of the following years:

11. What is the correct depreciation expense in 2017?

12. What is the correct net income in 2015?

13. What is the correct net income in 2016?

Prepared by: KBG Page 4 of 12

14. What is the correct net income in 2017?

2015 Php 381,000

During your examination, you discovered the following errors:

c. Accrual sales at each year end were consistently omitted as follows:

d. Accrual of salaries were also consistently omitted as follows:

15. What is the correct net income in 2015?

16. What is the correct net income in 2016?

17. What is the correct net income in 2017?

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b. Accumulated profits 30,000

c. Accumulated profits 9,000

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21. What is the correct net income in 2018?

23. What is the adjusted accumulated profits at the end of 2018?

b. Interest expense 25,000

c. Interest expense 25,000

d. Construction in progress 75,000

e. Retained earnings 25,000

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Your audit disclosed the following information:

28. What is the net amount of cash provided by operating activities?

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Sales Php 600,000

Your investigation revealed the following information:

31. How much was paid for inventory purchases?

32. How much was received from customers in 2017?

34. What is the correct interest expense in 2017?

35. What is the correct net income in 2017?

December 31, 2016 December 31, 2017

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Accrued wages 85,000 125,000

During the year:

36. Total sales for 2017 under accrual basis

37. Total purchases for 2017 under accrual basis

38. Accrual wages expense for 2017

39. Accrual advertising expense in 2017

40. Accrual insurance expense in 2017

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44. The depreciation expense for the current year is:

Beginning Balances Ending Balances

Beginning Balances Ending Balances

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Beginning Balances Ending Balances

Beginning Balances Ending Balances

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AUDITING PROBLEMS ADAYO/TADIAR