PA Empleo - Chapter 2.pdf

Chapter 2 Correction of Errors Problem 1 Under(Over) statement in Profit of

Retained

Nature of error

Earnings

2012 Accounts Affected

01/01/12 Omission of prepaid expenses 12/31/10 12/31/11 12/31/12 Omission of unearned revenue: 12/31/10 12/31/11 12/31/12 Omission of accrued expenses: 12/31/10 12/31/11 12/31/12 Omission of accrued revenues 12/31/10 12/31/11 12/31/12 Net under(over)statement Reported profit(loss) Corrected profit(loss)

2010

2011

29,000

(29,000) 30,000

(20,000)

(27,500)

42,500

24,000 300,000 324,000

2012

20,000 (28,000)

27,500 (25,000)

(42,500) 45,000

( 2,000) (540,000) (542,000)

(30,000) 34,000

28,000 (15,000)

25,000 (27,000)

(45,000) 41,000

11,000 250,000 251,000

 Account

30,000

(28,000)

(25,000)

45,000

Dr.

Expenses Prepaid expenses Expenses

2. A

3. D

Expenses Expenses  Accrued expenses

27,000

22,000

4. D

5. C

Problem 3 1.

2.

3.

4.

Retained Earnings Wages Expense

160,000

Interest Income Retained Earnings

48,000

Insurance Expense Prepaid Insurance Retained Earnings

18,000 18,000

Supplies Expense Retained Earnings

25,000

160,000

48,000

36,000

25,000

13

34,000

15,000

Problem 2 1. A

30,000 34,000

Revenue Revenue Unearned revenue

Revenues Accrued revenues Revenues

Cr.

28,000 15,000

25,000 27,000

45,000 41,000 41,000

Chapter 2 Correction of Errors 5.

6.

7.

8.

Retained Earnings  Accumulated Amortization – Development Cost Capitalized Development Cost  Amortization Expense – Development Cost

80,000 80,000

Retained Earnings Service Revenue Unearned Service Revenue

80,000

Retained Earnings Rent Revenue

36,000

120,000 40,000

40,000 40,000

36,000

Office Equipment Depreciation Expense - Equipment  Accumulated Depreciation Retained Earnings

1,500,000 300,000 900,000 900,000

Problem 4 (Function of Expense Method) 1. No entry, counterbalanced as of 12/31/11 2.

Retained Earnings Cost of Sales

3.

Retained Earnings Cost of Sales

4.

No entry ( no effect on cost of sales and profit of both 2011 and 2012; as both beginning inventory and purchases in 2012 had been transferred to cost of sales)

5.

Cost of Sales Retained Earnings

6.

Sales Retained Earnings

(Nature of Expense Method) 1. No entry, counterbalanced as of 12/31/11 2.

Retained Earnings Inventory, beginning

3.

Retained Earnings Purchases

4.

Inventory, beginning Purchases

5.

Inventory, beginning Retained Earnings

6.

Sales Retained Earnings

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Chapter 2 Correction of Errors Problem 5 (Dragon Ball Company) (1) Schedule to compute correct profit: Under(over)statement in Profit 2010 2011 Omission of accrued wages 12/31/10 12/31/11 12/31/12 Omission of unused supplies 12/31/10 12/31/11 12/31/12 Omission of accrued interest income 12/31/10 Sale of equipment - Proceeds Gain on sale Recorded depreciation Omission of unearned rent Net under(over)statement Reported Profit Corrected Profit

(80,000)

32,000

80,000 (60,000)

(32,000) 25,000

18,000 (25,000) 7,000 4,200

(18,000)

(43,800) 450,000 406,200

(800) 290,000 289,200

4,200

(2)  Audit adjusting entries: Retained Earnings Wages Expense

60,000

Wages Expense Wages Payable

78,000

Supplies Expense Retained Earnings

25,000

Unused Supplies Supplies Expense

22,400

Retained Earnings  Accumulated Depreciation Equipment Depreciation Expense

9,600 36,600

60,000

78,000

25,000

22,400

42,000 4,200

(3) Correcting entries in 2013 Retained Earnings Wages Expense

78,000

Supplies Expense Retained Earnings

22,400

Retained Earnings  Accumulated Depreciation Equipment

5,400 36,600

78,000

22,400

42,000

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2012

RE, 1/1/12

60,000 (78,000)

(60,000)

(25,000) 22,400

25,000

4,200 (9,600) (40,000) (56,400) (44,600) 440,000 383,600

Chapter 2 Correction of Errors Problem 6 (Erasure Company) 1.

Accumulated Depreciation Depreciation Expense Retained Earnings

2.

No entry (counterbalanced)

3.

Loss on Damages Retained Earnings

4.

5.

6.

16,500 5,500 11,000

585,000 585,000

Goodwill 12,000 Retained Earnings (Note: Goodwill is not subject to amortization) Retained Earnings Sales

328,500

Retained Earnings  Accumulated Depreciation Equipment

18,000 2,000

Repairs and Maintenance Equipment

30,000

328,500

20.000

30,000

 Accumulated Depreciation (10% x (20,000+ 30,000) Depreciation Expense 7.

8.

12,000

5,000 5,000

Cost of Sales Retained Earnings

21,000

Cost of Sales Inventory

20,000

21,000

20,000

No entry ( no effect on cost of sales of 2011 and 2012; Cost of sales had been set up; both purchases and beginning inventory for 2012 had been transferred to cost of sales)

Problem 7 (Gloria Company)  Audit adjustments to correct 2011 financial statements

Audit adjustments to correct 2012 financial statements

Other operating income Unearned commission income

Retained earnings Other operating income

8,000

Prepaid rent 16,000 Selling and administrative expenses

8,000

16,000

8,000 8,000

Other operating income 6,400 Unearned commission income

6,400

Selling and administrative expenses Retained earnings

16,000

16,000

Prepaid rent 21,000 Selling and administrative expenses

16

21,000

Chapter 2 Correction of Errors Interest receivable Other operating income

8,000 8,000

Other operating income Retained earnings

8,000

Interest receivable Interest income

12,000

Sales

90,000

8,000

12,000

 Advances from customers Cost of sales  Accounts payable

15,000

Equipment Selling and administrative expenses

20,000

Selling and administrative expenses  Accumulated depreciation

15,000

20,000

2,000 2,000

90,000

Retained earnings Cost of sales

15,000

Equipment Retained earnings  Accumulated depreciation

20,000

Selling and administrative expenses Accumulated depreciation

4,000

15,000

18,000 2,000

4,000

(a) Gloria Company Comparative Statements of Comprehensive Income For the Years Ended December 31, 2012 and 2011

Sales Cost of Sales Gross Profit Other Operating Income Total Income Less: Selling and Administrative Expenses Net Income from Operations Interest Expense Net Income

P P P P P

(b) Effect on total assets, December 31, 2011 (see audit adjusting entries for 2011) = 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated

(c) Effect on total assets, December 31, 2012 (see audit adjusting entries for 2012) = 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated. (d) Effect on total liabilities, December 31, 2012 (see audit adjusting entries for 2012) = 6,400 + 90,000 = 96,400 understated

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2012 910,000 585,000 325,000 73,600 398,600 279,000 119,600 80,000 39,600

P P P P P

2011 720,000 465,000 255,000 30,000 285,000 156,000 129,000 20,000 109,000

Chapter 2 Correction of Errors Problem 8 Golden Crest

Particulars Omission of unused supplies 12/31/11 12/31/12 Repairs charged to equipment on 1/1/10  AFS securities were measured at cost Correct cost of equipment, P746,070 Recorded cost 900,000 Difference 153,930 Difference in depreciation 2011 153,930/10 x 3/12 = 3,848 2012 153,930 / 10 =15,393 Interest expense 2011 P255,393 x 3/12 = Net under (overstatement)

2011 Profit

Retained earnings, Dec. 31, 2011

15,000

15,000

(8,500)

(68,000)

Non- current  Assets, 12/31/12

Retained earnings January 1, 2011

(59,500) 50,000

(76,500)

(153,930) 3,848

3,848

(63,848) (53,500)

(63,848) (113,000)

Present value of the note on October 1, 2011 = 300,000 x 2.4869 = 746,070  Amortization table for the note payable Date Periodic Payment Applied to Interest October 1, 2011 September 30, 2012 300,000 74,607 September 30, 2013 300,000 52,068 Problem 9 (Golden Harvest Corporation) (a) Computation of correct profit (loss) Particulars Omissions of  Accrued expenses, 12/31/11 12/31/12 12/31/13  Accrued income 12/31/11 12/31/12 12/31/13 Prepaid expenses 12/31/11 12/31/12 12/31/13 Unearned income 12/31/11 12/31/12 12/31/13 Omission in the ending inventory 2012 2013 Machine charged to expense on August 31, 2011 Depreciation on the machine Net understatement (overstatement) Reported profit (loss) Correct profit (loss)

Applied to Principal 225,393 247,932

2012

(20,000)

20,000 (25,000)

12,000

(15,000)

80,000 (3,333) 85,667 (250,000) 164,333

18

(144,182)

2011

32,000

Computation of retained earnings

3,848 15,393

(32,000) 30,000 (12,000) 18,000 15,000 (10,000)

(76,500)

Bal. of Principal 746,070 520,677 272,745

2013

25,000 (30,000) (30,000) 26,000 (18,000) 24,000 10,000 (8,000)

28,000

(28,000) 64,000

(10,000) 22,000 320,000 342,000

(10,000) 25,000 380,000 405,000

Chapter 2 Correction of Errors 2011 P 0 (164,333)

Balance, January 1 Profit (loss) Dividends declared Balance, December 31

P(164,333)

2012 P(164,333) 342,000 (60,000) P117,667

2013 P117,667 405,000 (100,000) 422,667

(b) 2013 Audit Adjusting Entries Retained Earnings Operating Expenses

25,000

Operating Expenses  Accrued Expenses

30,000

Income Retained Earnings

30,000

 Accrued Income Income

26,000

Expenses Retained Earnings

18,000

Prepaid Expenses Expenses

24,000

Retained Earnings Income

10,000

25,000

30,000

30,000

26,000

18,000

24,000

10,000

Income Unearned Income

8,000 8,000

Inventory, beginning/Cost of Sales Retained Earnings

28,000

Inventory, end Income Summary/ Cost of Sales

64,000

Machinery Operating Expenses Retained Earnings  Accumulated Depreciation

80,000 10,000

28,000

64,000

66,667 23,333

Problem 10 (Sukiyaki Corporation) 2011 Audit Adjustments to restate 2011 FS

Other Operating Expenses – Unrealized Loss on Trading Sec. Held for Trading Equity Securities

Audit Adjustments to Restate 2012 FS  Allowance for Doubtful Accounts 5,000 Operating Expenses 32,000 – 37,000 = 5,000

3,000 3,000

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Held for Trading Equity Securities 7,000 Retained Earnings 3,000 Other Operating Income – Unrealized Gain on Trading Sec.

5,000

10,000

Chapter 2 Correction of Errors Cost of Sales Merchandise Inventory

8,900 8,900

Equipment Operating Expenses

36,000

Operating Expenses  Accumulated Depreciation (36,000 -6,000)/10

3,000

36,000

3,000

Retained Earnings Cost of Sales

8,900

Cost of Sales Merchandise Inventory

13,600

Equipment Retained Earnings

36,000

Retained Earnings Operating Expenses Accumulated Depreciation

3,000 3,000

8,900

13,600

36,000

6,000

 Accumulated Depreciation 20,000 Equipment Other Operating Income – Gain on Sale of Equipment Prepaid Insurance Operating Expenses Retained Earnings

6,000 3,000 9,000

Prepaid Insurance Operating Expenses Retained Earnings

2012 P1,000,000 434,700 P 565,300 3,000 10,000 578,300 (351,000) P227,300

6,000

2011 P900,000 403,900 P 496,100 ________ 496,100 (280,000) (3,000) P 213,100

Sukiyaki Corporation Statement of Financial Position December 31, 2012 and 211 2012 Current Assets Cash Held for Trading Equity Securities  Accounts Receivable, net Merchandise Inventory Prepaid Expenses Total Current Assets Non-Current Assets Property, Plant and Equipment, net of Acc. Deprn Total Assets

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3,000

3,000 3,000

Sukiyaki Corporation Statement of Comprehensive Income For the Years Ended December 31, 2012 and 2011

Sales Cost of Sales Gross Profit Gain on Sale of Equipment Unrealized Gain on Trading Securities Total Income Operating Expenses Unrealized Loss on Trading Securities Profit

17,000

2011

P183,000 85,000 360,000 193,400 3,000 P 824,400

P 2,000 75,000 278,000 193,100 6,000 P554,100

P 78,400 P902,800

P 96,100 P650,200

Chapter 2 Correction of Errors Current Liabilities  Accounts Payable

P121,400

P196,100

Shareholders’ Equity Ordinary Share Share Premium Retained Earnings Total Shareholders’ Equity Total Liabilities and Shareholders’ Equity

P260,000 20,000 501,400 P781,400 P902,800

P180,000 0 274,100 P 454,100 P650,200

Cash Flow Statement For the Year Ended December 31, 2012

Cash Flow From Operating Activities Collection from customers Payment to Suppliers Payment for expenses Net cash flow from operations Cash Flow From Investing Activities Sale of equipment Purchase of equipment Net cash flow from investing activities Cash Flow From Financing Activities Issue of ordinary share (80,000 + 20,000) Increase in cash Cash Balance, January 1, 2007 Cash Balance, December 31

P904,000 (509,700) (315,800) P78,500 P 3,000 ( 500) 2,500 100,000 P181,000 2,000 P183,000

Computations:  Accounts Receivable  Allowance for Uncollectible Accounts  AR, Net

2012 P392,000 32,000 P360,000

2011 P296,000 18,000 P278,000

Property, Plant and Equipment Cost  Accumulated Depreciation Carrying value

P186,000 107,600 P 78,400

P205,500 109,400 P 96,100

 Accounts Receivable, beg. Sales  Accounts Receivable, end Collections from customers

P296,000 1,000,000 (392,000) P904,000

Inventory, end Cost of sales Inventory, beg. Purchases  Accounts Payable, beginning  Accounts Payable, end Payment to suppliers

P193,400 434,700 (193,400) P434,700 196,100 (121,400) P509,700

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Chapter 2 Correction of Errors  Accumulated depreciation, end  Accumulated depreciation of equipment sold  Accumulated depreciation, beg. Depreciation expense

P107,600 20,000 (109,400) P18,200

Operating expenses Depreciation Doubtful accounts expense 32,000 – 18,000 Decrease in prepaid expenses Operating expenses paid

P351,000 ( 18,200) ( 14,000) ( 3,000) P315,800

Property, Plant and Equipment, cost, end Cost of equipment sold Property, plant and equipment, cost, beg. Equipment purchased

P186,000 20,000 (205,500) P 500

Problem 11 (Tahoma Corporation)  Adjusting Entries – December 31, 2012 Sales

100,000 Retained Earnings

100,000

 Accounts Receivable Sales

250,000

Retained Earnings Purchases

175,000

Purchases  Accounts Payable

140,000

250,000

175,000

140,000

Sales

20,000 Unearned Revenue

20,000

Retained Earnings Expenses

35,000 35,000

Expenses  Accrued Expenses

50,000

Inventory, beginning Retained Earnings

75,000

Inventory, end Income Summary

110,000

50,000

75,000

110,000

 Advances to Suppliers Purchases

50,000 50,000

Retained Earnings Expenses  Accumulated Depreciation – Printing Equipment

3,333 10,000 13,333

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Chapter 2 Correction of Errors Expenses Retained Earnings  Accumulated Depreciation – Building

37,500 12,500

Expenses  Allowance for Uncollectible Accounts

25,000

50,000

25,000

Interest Expense (500,000 x 12% x 8/12) 40,000 Retained Earnings (500,000 x 12% x 4/12) 20,000 Operating Expenses 60,000 (Note: 2 semi-annual payments were made in 2012; both were charged to operating expenses, balance of Mortgage payable before the annual payment in August 2012 is 450,000 + 50,000) Interest Expense Interest Payable 450,000 x 12% x 4/12

18,000 18,000

Tahoma Company Statement of Comprehensive Income For the Year Ended December 31, 2012 Sales Cost of Sales Inventory, January 1 Purchases Inventory, Dec. 31 Cost of Sales Gross Profit Selling and Administrative Expenses Profit before interest expense Interest expense Profit

P 2,180,000 75,000 915,000 (110,000) 880,000 1,250,000 777,500 472,500 58,000 414,500 Tahoma Company Statement of Financial Position December 31, 2012

 Assets Current Assets Cash  Accounts receivable, net of allowance for uncollectible accounts of P25,000  Advances to suppliers Inventory Total current assets Non-current assets Land Building, net of P50,000 accumulated depreciation Printing equipment, net of P13,333 accumulated depreciation Total property, plant and equipment Total assets

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P 750,000 225,000 50,000 110,000 P1,135,000 P 400,000 700,000 86,667 P1,186,667 P2,321,667

Chapter 2 Correction of Errors Liabilities and Shareholders’ Equity Current Liabilities  Accounts payable  Accrued expenses Current portion of mortgage payable Interest payable Unearned revenue Total current liabilities

P 140,000 50,000 50,000 18,000 20,000 P278,000

Non-current liabilities Mortgage payable, net of current portion Total liabilities

P 400,000 P 678,000

Shareholders’ Equity Ordinary share capital Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

P 1,000,000 *643,667 P 1,643,667 P2,321,667

*Retained earnings, January 1, 2012 before adjustment Correction of prior period errors Profit for 2012 Retained earnings, December 31, 2012

P 300,000 ( 70,833) 414,500 P 643,667

Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.. 14. 15.

A C A A B A A B B D B B C B A

16. 17. 18. 19 20.

D C C A

700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000 -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 ) - 29,000 – 15,000 + 22,000 = (22,000) 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000 (300,000) + (50,000) + 100,000 = (250,000) - 16,000 – 15,000 – 10,000 + 10,800 = (30,200) - 15,000 + 10,800 = (4,200) 5,000,000 – 200,000 – 150,000 = 4,650,000 2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000 1,500,000 + 600,000 = 2,100,000 1,000,000 + 500,000 + 200,000 = 1,700,000 200,000 / 5 155,000 + 1,000 – 8,000 + 12,000 – 5,500 – 10,000 = 144,500 3,000,000 – 400,000 = 2,600,000 Profit is understated by 7,000 + 3,000; RE is understated by P3,000; P7,000 has been counterbalanced. 50,400 / 9 = 5,600 54,000 – 11,200 = 42,800 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement -300,000 – 500,000 + 200,000 = 600,000 overstated

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