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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

13

34,000

15,000

Problem 2
1. A

30,000
34,000

Revenue
Revenue
Unearned revenue

Revenues
Accrued revenues
Revenues

25,000

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

14

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

15

2012

RE, 1/1/12

60,000
(78,000)

(60,000)

(25,000)
22,400

25,000

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

(9,600)
(44,600)

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

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

8.

12,000

328,500

20.000
30,000

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


Depreciation Expense
7.

5,500
11,000

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
Other operating income
Unearned commission income

Audit adjustments to correct 2012 financial statements

8,000

Prepaid rent
16,000
Selling and administrative expenses

8,000

16,000

Retained earnings
Other operating income

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

17

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

2011
0
(164,333)

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

Income
Unearned Income

10,000

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

19

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

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

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

20

3,000

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

17,000

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

36,000

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

21

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

Sales

250,000
175,000
140,000
20,000

Unearned Revenue

Retained Earnings
Expenses

20,000

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

22

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

23

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

24