AP.m 1401 Correction of Errors

AP.M-1401 Correction of Error Straight Problems Problem 1 You were able to gather the following in connection with your audit of Russell Inc. for the year ended December 31,2013:

Accounts Receivable Notes Receivable- Trade Allowance for Bad debts Unpaid merchandise invoice Accrued Wages Advertising Supplies Inventory Accrued Advertising Expense Prepaid Insurance Unexpired Insurance Merchandise Inventory Equipment, net

December 31,2012 P 6,400,000 1,000,00 0.00 380,0 00.00 4,632,00 0.00 85,0 00.00 35,0 00.00

12/31/2013 P4,000,000 2,500,0 00.00 450, 000.00 2,621,0 00.00 125, 000.00 75, 000.00

14,2 50.00 25,0 00.00

40, 000.00

2,250,00 0.00 11,000,00 0.00

41, 000.00 3,120,0 00.00 15,000,0 00.00

During the year:  Amount collected from customer, P10,000,000 excluding a P100,000 collection from a previously written-off account. Write-off of accounts receivables during the year amounted to P150,000.  Sales returns (all prior to collections) amounted to P125,000 while sales discounts granted to customers amounted to P300,000.  Total payments to suppliers of merchandise amounted to P8,250,000. Purchase returns (all prior to payments amounted to P300,000).  Wages, Advertising and Insurance payments during the year were at P2,050,000, P300,000 and P125,000 respectively.  The only transaction apart from the depreciation for the year , affecting equipment’s net book value was the equipment acquisition at the beginning of the year costing P4,500,000.

Required: 1. Gross sales for 2013 under accrual basis. P9,600,000 2. Gross purchases for 2013 under accrual basis. P6,539,000 3. Accrual wages for 2013. P2,090,000 4. Accrual Advertising Expense for 2013. P285,750 5. Accrual Basis net Income for 2013. P776,250 Problem 2 Azrael’s Garden, a calendar year sole-proprietorship, maintained its books on the cash basis during the year. Azrael is in the process of negotiating a bank loan to finance the planned expansion of its business. The bank is requesting 2014 financial statements prepared on the accrual basis of accounting from Azrael. As Azreal’s external auditor, you were called upon to assist in preparing the financial statements. The following information were obtained during the course of your engagement: Azrael’s Garden TRIAL BALANCE December 31, 2014 Debits Credits CashP448,000 Accounts Receivable,12/31/13 283,500 Inventory,12/31/13 1,085,000 Furniture and Fixtures 2,068,500 Leasehold improvements 787,500 Accumulated Depreciation,12/31/13 P567,000 Accounts Payable 297,500 Azrael’s Drawings Azrael’s capital 2,180,500 Sales 11,427,500 Purchases 5,339,250 Salaries Expense 3,045,000 Taxes and Licenses 217,000 Insurance expense 152,250 Rent Expense 598,500 Utilities expense 220,500 Living expenses 227,500 _________ P14,472,500 P14,472,500 a. At December 31,2014, amounts due from customers totaled P415,000. b. Based on the analysis of the above receivables, P20,750 may prove uncollectible.

c. Unpaid invoices for plant purchases totaled P533,750 and P297,500 at December 31, 2014 and December 31, 2013 respectively. d. The inventory totaled P1,274,000 based on physical count of the goods at December 31,2014. The inventory was priced at cost, which approximates market value. e. On May 1,2014, Azrael paid P152,250 to renew its comprehensive insurance for one year. The premium on the previous policy which expired on April 30,2014 was P136,500. f. On January 2, 2014 Azrael entered into a twenty-year operating lease for the vacant lot adjacent Azrael’s retail store used as a parking lot. As agreed in the lease, Azrael paved and fenced in the lot at a cost of P787,500. The improvement were completed on April 1,2014 and estimated to have a useful life of fifteen years. No provision for deprecation has been recorded. Depreciation on furniture and fixture was P210,000 for 2014. g. Accrued expenses at December 31, 2014 and 2013 were as follows: 2014 2013 Taxes and licenses P33,750 P20,250 Utilities 36,000 24,750 P69,750 P45,000 h. Azrael is being sued for P4,000,000. The coverage under the comprehensive insurance policy is limited to P2,500,000. Azrael’s attorney belives that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P3,000,000. i. The salaries account includes P40,000 per month paid to the proprietor. Azrael also receives P4,375 per week for living expenses. Required: Detremine the amount to be reported for the following items in Azrael’s financial statements as of and for the year ended December 31,2014 under accrual basis of accounting. (Disregard income taxes) 1. 2. 3. 4. 5.

Net Income P1,629,625 Current Assets P2,167,000 Noncurrent assets P2,039,625 Azrael capital,12/31/13 P2,181,000 Azrael capital,12/31/14 P3,103,125

Problem 3 The following data are obtained from the single entry records kept by Joshu Merchandising for 2013: December 31 January 1 Cash Accounts receivable Notes receivable Equipment Notes payable Accounts Payable Accounts Payable

1,600,000 2,000,000 1,200,000 960,000 1,120,000 480,000 1,040,000

1,200,000 1,600,000 400,000 1,600,000 1,200,000 720,000 1,200,000

Accrued Interest Payable Unearned rent Income

40,000 40,000

80,000 120,000

The cashbook shows the following information: Balance, January 1 Receipts: Accounts Receivable (after discounts of P100,000) Notes receivable Cash Sales Rent Income Sale of equipment costing P200,000 and book value of P100,000 Additional cash investment by the owner

1,200,000 3,000,000 960,000 800,000 80,000 120,000 600,000

5,560,000

Payments Accounts Payable Notes payable Cash purchases Interest Expense Expenses Equipment Withdrawals by owner Balance, December 31 Audit Notes:  Accounts receivable of P120,000 was written off as uncollectible.  Returns of P320,000 were on merchandise sales.  Allowances for P80,000 were received in merchandise purchases.

Required: Determine the audited balances of the following: 1. Net Sales P6,080,000 2. Net Purchases P3,000,000 3. Cost of Sales P3,640,000 4. Rent Income P160,000 5. Interest expense P 120,000 6. Depreciation expense P380,000 7. Net Income P1,320,000

1,520,000 1,280,000 600,000 160,000 800,000 400,000 400,000 5,160,000 P1,600,000

Problem 4 When the records of Merlita Merchandising Company were reviewed at the close of 2013, the errors listed below were discovered. 1. For each item, indicate the effects of each of the following errors by writing O for overstatement, U for understatement and X for no effect in the appropriate column. 2012 N I Failure to record purchases of merchandise on account of P25,000 at the end of 2012. Sale of merchandise on account on December 30,2012 amounting to P20,000 was not recorded until the customer paid his account on january 2013. Depreciation expense on equipment in 2012 was overstated by P10,000. Paid one year insurance premium of P24,00 effective April 1,2012. The entire amount was debited to expense account and no adjustment was made at the end of 2012. On December 31,2012, the Company acquired a parcel of land and a building at a total cost of P500,000. The entire amount paid was debited to land account. A reasonable estimate of the cost that should have been alocated to the building was P200,000. The building has an estimated life of 20 years. Failure to record supplies on hand at the end of 2012. The supplies on hand amounted to P5,000. Understatement of 2012 ending inventory worth P24,000. Failure to record accrued interest on notes payable at the end of 2012.Notes payable,principal amount P100,000;interest rate, 10%;acquired March 31,2012. Failure to recognize unearned rent at the end of 2012 worth P12,000.

Ass et

Liabilit y

RE,befor e closing

2013 Re, after closing

N I

Ass et

Liabilit y

RE,befor e closing

Re, after closin g

Goods received in December 2012 were recorded as purchases when paid in 2013. The goods were excluded from the 2012 ending inventory.

Answer: 2012

2013 Ass et

Liabilit y

Ass et

Liabilit y

O

X

U

X

O

U

X

X

O

X

U

U

X

X

U

O

X

X

U

X

U

U

X

X

U

X

U

X

U

U

U

U

X

X

U

O

X

X

U

X

On December 31,2012, the Company acquired a parcel of land and a building at a total cost of P500,000. The entire amount paid was debited to land account. A reasonable estimate of the cost that should have been alocated to the building was P200,000. The building has an estimated life of 20 years.

X

X

X

X

X

O

O

X

X

O

Failure to record supplies on hand at the end of 2012. The supplies on hand amounted to P5,000.

U

U

X

X

U

O

X

X

U

X

Understatement of 2012 ending inventory worth P24,000.

U

U

X

X

U

O

X

X

U

X

O

X

U

X

O

U

X

X

O

X

O

X

U

X

U

X

X

X

O

X

Failure to record accrued interest on notes payable at the end of 2012.Notes payable,principal amount P100,000;interest rate, 10%;acquired March 31,2012. Failure to recognize unearned rent at the end of 2012 worth P12,000.

N I

Re, after closin g

N I Failure to record purchases of merchandise on account of P25,000 at the end of 2012. Sale of merchandise on account on December 30,2012 amounting to P20,000 was not recorded until the customer paid his account on january 2013. Depreciation expense on equipment in 2012 was overstated by P10,000. Paid one year insurance premium of P24,00 effective April 1,2012. The entire amount was debited to expense account and no adjustment was made at the end of 2012.

Re, after closing

RE,befor e closing

RE,befor e closing

Goods received in December 2012 were recorded as purchases when paid in 2013. The goods were excluded from the 2012 ending inventory.

X

U

U

X

X

X

X

X

X

X

Problem 5 The income statement of Menandro Inc. showed the following net income: 2013 P1,750,000 2014 2,000,000 An examination of the accounting records for the year ended December 31,2014 revealed that several errors were made. The following errors were discovered: a. Salary accrued at year end and were consistently omitted: 2013 P100,000 2014 140,000 b. The footings and extensions showed that the inventory on December 31,2013 was overstated by P190,000. c. Prepaid insurance of P120,000 applicable to 2015 was expensed in 2014. d. Interest receivable of p20,000 was not recorded on December 31,2014. e. On December 26,2014 an equipment costing P400,000 was sold for P220,000. At the date of sale, the equipment had an accumulated depreciation of P240,000. The cash received was recorded as miscellaneous income in 2014. f. A building which had a fair value of P1,200,000 was accepted form the city government as a donation on January 1.2013. The building that was estimated to be useful for another 10 years was to be used as factory site as a condition on the grant. Legal fees incurred in relation to the donation was at P100,000 and was charged to 2013 operating expenses. Another P200,000 was incurred to remodel and renovate the building prior to use. The building was capitalized at P200,000 (renovation cost) and was depreciated over remaining life using straight line. Required: 1. Correct net income in 2013. P1,550,000 2. Correct net income in 2014. 2,120,000 3. What is the retroactive adjustment to the 2015 beginning retained earnings ? 80,000 Increase 4. What is the net effect of errors to the 2014 working capital? 0 5. What is the correct carrying value of the building as of December 31,2014? 1,200,000 Problem 6 The income statement of Japhet Company for the years ended December 2013,2014,2015 indicate the following net income: 2013 170,000 2014 205,000

2015 186,000 An examination of the accounting records for three years indicates that several errors were made in arriving at the net income amounts reported. The following errors were discovered. a. Sale of merchandise on account amounting to 15,000 was not recorded at the end of 2014. b. Goods costing P8,000 were in transit from a supplier on December 31,2013. The ggods were appropriately included in the ending inventory but the corresponding purchase was not recorded. c. Accrued salaries were consistently omitted from the records. The amounts omitted were: 2013 P10,000 2014 14,000 2015 16,000 d. The merchandise inventory at December 31,2014 was understated by P9,000 as the result of errors made in the footings and extensions on inventory sheets. e. Unexpired insurance of P12,000 applicable tp 2014 was expensed in 2013. f. Interest receivable of P2,400 was not recorded on December 31,2014. g. On January 2,2014, a piece of equipment costing p40,000 was solf 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 2014. In addition, depreciation was recorded for this equipment in both 2014 and 2015 at the rate of 10% of cost. Required: Compute the adjusted net income from 2013 t0 2015. 2013 164,000 2014 211,400 2015 161,600 Problem 7 You are auditing the financial statement of Ariel Company for the first time. You have discovered that the merchandise inventory at the end of each year was understated by P100,000 and P200,000 in 2013 and 2014 respectively. In addition in inspecting the record of the company, you discovered that some items had been improperly recorded and that certain yearend adjustments had been overlooked in 2013 and 2014. These omissions and other errors for each summarized as follows: Accrued Salaries Accrud interest income Prepaid Insurance Advances form customers (collections from customers had been recorded as sales but should have been recognized as advances form customers because goods were not shipped until the followin year.) Machinery (Capital expenditures had been recorded as repairs but

12/31/2013 780,000 213,000 307,800 561,000

13/31/2014 873,600 259,200 384,000 470,400

522,000

564,000

should have been charged to machinery;the depreciation rate is 10% per year, but depreciaton in the year of expenditure is to be recognized at 5%)

Required: Based on the above data and the result of your audit, provide the following: 1. Total effects of errors on 2013 net income. 65,000 overstated 2. Total effects of errors on the 2014 net income. (420,000) understated 3. Total effect of errors on the balance of the company’s retained earnings at December 31,2014? (355,100) Understated 4. What is the effect of the 2013 errors in the 2014 net income? (544,000) understated 5. What is total effect of errors on the company’s working capital at December 31,2014? 620,200 overstated 6. The necessary adjusting entry for the error in recording capital expenditures on Machinery as of December 31,2013. Machinery 564,000 Deprecation expense 56,400 Accumulated deprecation 84,600 Retained earnings 535,800 Multiple Choice Questions Questions 1through 5 are based on the following information: Your audit Kuia Company disclosed 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 a copy of ticket, and this copy was given to the customer when he paid his account. Additional information: a. On January 2, 2014 Kuia Company statrted business and issued share capital, 72,000 shares with P100 par for the following considerations: Cash P600,0000 Building(useful life, 15 years) 5,400,000 Land 1,800,000 P7,800,000 b. An analysis of the bank statements showed total deposits including the original cash investment of P4,200,000. The balance in the bank statement on Decmeber 31, 2014 was P300,000 but there were checks amounting to P60,000 dated in December but not paid by the bank until January 2015. Cash on hand on December 31,2014 was P150,000 including customer’s deposit of P90,000.

c. During the year, Kuia borrowed P600,000 from the bank and repaid P150,000 and P30,000 interest. d. Disbursements paid in cash during the year were as follows: Utilities P120,000 Salaries 120,000 Supplies 240,000 Dividends 180,000 P660,000 e. An inventory of merchandise taken on December 31,2014 showed P906,000 of merchandise. f. Ticjets for accounts receivable totalled P1,080,000 but P60,000 of that amount may prove uncollectible. g. Unpaid suppliers invoices for merchandise amounted to P420,000. h. Equipment with a cash price of P480,000 was purchased in early January on a one year installment basis. During the year, checks for the downpayment and all maturing installments totalled P534,000. The equipment has a useful life of 5 years. Required: Based on the above and the result of your audit, determine the following: (disregard income taxes) 1. Payment for merchandise purchases in 2014 a. P2,646,000 c. P2,436,000 b. P2,586,000 d. P3,246,000 2. Collections from sales in 2014 a. P3,720,000 c. P4,320,000 b. P3,000,000 d. P4,920,000 3. Net income for the year ended December 31,2014 a. P1,560,000 c. P1,770,000 b. P1,620,000 d. P960,000 4. Shareholders’ equity as of December 31, 2013 a. P9,180,000 c. P9,390,000 b. P9,240,000 d. P8,580,000 5. Total assests as of December 31, 2014 a. P9,540,000 c. P9,450,000 b. P9,583,200 d. P9,390,000 Questions 6 through 8 are based on the following information: You were first appointed auditor of Jeffrey Corporation in 2014. YOU completed the audit for 2014 and prepared audited financial statements directly from the audit working papers. You have returned to make the 2015 audit and discovered that the client’s bookkeeper failed to record adjusting entries you made in 2014 audit working papers, which you entailed adjustments for the following items: a. The December 31, 2014 inventory was understated by P5,000. b. No entry was made for accrued utilities expense of P2,500 as of yearend. c. Ordinary motor repairs of P3,200 were charged to accumulated depreciation during 2014.

d. The company failed to record the provision for uncollectible accounts in the amount of P6,000. Your examination for the 2015 entries in the accounts uncovered the ff:  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.  A 2014 accounts receivable in the amount of P4,000 had been written off uncollectible by a charged to retained earnings.  Salemen’s commission includes P2,400 paid on undelivered customers’ orders. Additional data:  The audited statement of 2014 showed a net income of P250,000  The unadjusted net income for 2015 is P320,000. Required: 6. The unadjusted net income for the year 2014 is: a. P253,500 c. P256,700 b. P263,700 d. P261,700 7. The adjusted net income for the year 2015 is: a. P315,900 c. P308,400 b. P310,900 d. P314,900 8. By how much would the December 31,2015 retained earnings be misstated if no adjustments were made for the above errors? a. Retained earnings overstated by P11,800. b. Retained earnings overstated by P15,800. c. Retained earnings overstated by P12,800. d. Retained earnings overstated by P16,800. Questions 9 through 10 are based on the following information: Janice 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 your audit, the following additional information were obtained: a. An account payable of P8,000 for merchandise purchased on November 23,2014 was recorded in December 2014. This merchandise was included in inventory at November 30,2014. b. Based on an aging of the accounts receivable as of November 30,2014, it was estimated that P40,000 of the receivables will become uncollectible. The allowance for bad debts has a credit balance of P5,000. c. A check for P1,800 from a customer to apply his account was received on November 30, 2014 but was not recorded until December 2, 2014. d. A P5,000 insurance premium paid on November 30,2014 on a policy expiring one year later was charged to office supplies. e. On June 1,2014, a production machine purchased for P24,000 was charged to Accumulated Depreciation. Janice Corporation depreciates machine of this type on a straight line method over a 5-year life with no salvage value. f. Research and development costs of P150,000 were incurred in the development of a patent which Janice expects to be granted during the fiscal year ending November

30,2014. Vince initiated a 5 year amortization of the P150,000 total cost during the fiscal year ended Novemeber 20,2014. g. During December 2014, a competitor filed suit against Janice corporation for patent infringement claiming P300,000 in damages. At December 31,2014, Janice’s legal counsel felt that the likelihood of losing the lawsuit was possible but not probable. No provision has been booked for this lawsuit. h. The November 30,2013 inventory was understated by P16,000. i. Income statement prepared by the client reflected an income of P450,000. Based on the foregoing data, answer the ff requirements: 9. The adjusted net income for the fiscal year ended November 30,2014 should be: a. P300,600 c. P265,600 b. P266,200 d. P268,600 10. What is the net effect of the above errors on the total assets at November 30,2014? a. Total assets overstated by P157,400. b. Total assets overstated by P133,400. c. Total assets overstated by P141,400. d. Total assets overstated by P117,400.