PROBLEM 1:

On January 4, 2011, GUYANA, INC. purchased computer hardware for P600,000. On the
date of acquisition, Guyanas management estimated that the computers would have an
estimated useful life of 5 years and would have a residual value of P60,000. The company used
the doubledecliningbalance method to depreciate the computer hardware.
In January 2012, Guyanas management realized that technological advancement had
made the computers virtually obsolete and that they would have to be replaced. Management
decided to change the estimated useful life of the computer hardware to 2 years.
How much depreciation on computer hardware should be recorded in 2012?
A. P144,000
C. P300,000
B. P120,000
D. P360,000
PROBLEM 2:
TONGA COMPANY decided on January 2, 2012, to review its accounting practices. This is
due to changing economic conditions and to make its financial statements more comparable to
those of other companies in its industry.
The following changes will be effective as of January 1, 2012:
a) Tonga decided to change its allowance for bad debts from 2% to 4% of its outstanding
receivables balance. Tongas receivable balance at December 31, 212, was P690,000.
Allowance for bad debts had a debit balance of P2,000 before adjustment.
b) Tonga decided to use the straight-line method of depreciation on its equipment instead of the
sum-of-years-digits method. It was also decided that this asset has 10 more years of useful
life as of January 2, 2012. The equipment was purchased on January 1, 2002, at a cost of
P1,000,000. On the acquisition date, it was estimated that the equipment would have a 15year useful life with no residual value.
1. The entry to record the current year provision of bad debts is
A. Bad debt expense
29,600
Allowance for bad debts
29,600
B. Allowance for bad debts
29,600
Bad debt expense
29,600
C. Bad debt expense
25,600
Allowance for bad debts
25,600
D. Allowance for bad debts
25,600
Bad debt expense
25,600
2. What is the amount of depreciation on equipment for the current year?
A. P45,833
C. P13,750
B. P9,167
D. P32,083
PROBLEM 3:
In the past, PERA COMPANY has depreciated its computer hardware using the straight-line
method. The computer hardware has a 10% salvage value and an estimated useful life of 5
years. As a result of the rapid advancement in information technology, management of Pera has
determined that it receives most of the benefits from its computer facilities in the first few years
of ownership. Hence, as of January 1, 2012, Pera proposes changing to the sum-of-years-digits
method for depreciating its computer hardware. The following computer purchases were made
by Pera at the beginning of each year.
2009
2010
2011

P90,000
50,000
60,000

1. How much depreciation expense was recorded by Pera in 2009, 2010, and 2011?
2009
2010
2011
A. P18,000 P28,000
P40,000
B. 36,000 36,000
36,000
C. 16,200 36,000
36,000
D. 16,200 25,200
36,000
2. The amount of depreciation expense that should be recognized in 2012 is
A. P21,240
C. P52,380
B. P63,280
D. P34,200
3. What journal entry, if any, should be prepared on January 1, 2012, to adjust the accounts?

A. Retained earnings
32,400
Accumulated depreciation
32,400
B. Accumulated depreciation
32,400
Retained earnings
32,400
C. Depreciation expense
32,400
Accumulated depreciation
32,400
D. No entry is necessary
PROBLEM 4:
On January 1, 2012, management of TUVALU COMPANY decided to make a revision in the
estimates associated with its production equipment. The equipment was acquired on January 3,
2010, for P800,000 and had been depreciated using straight-line method. At the date of
acquisition, it had an estimated useful life of 10 years with an estimated salvage value of
P50,000. Management has determined that the equipments remaining useful life is 4 years and
that it has an estimated residual value of P60,000.
1. What is the annual depreciation expense recognized in 2010 and 2011?
A. P80,000
C. P74,000
B. P75,000
D. P125,000
2. What is the amount of depreciation expense that should be recognized in 2012 as a result of
the change in estimates?
A. P147,500
C. P125,000
B. P75,000
D. P150,000
PROBLEM 5:
ECUADOR CORP. was organized on January 1, 2009. An analysis of the companys allowance for
bad debts accounts reveals the following:
Estimated Bad
Actual Bad Debts
Debts
2009
P15,000
P3,000
2010
26,000
5,000
2011
35,000
9,500
2012
No provision yet
8,000
In the past, bad debts had been estimated at 3% of credit sales. The Ecuador Corp.s accountant
has determined that the 3% rate is inappropriate and suggested that it be revised downward to
1%. Credit sales for the year ended December 31, 2012, totaled P950,000.
1. Prepare the entry to record bad debt expense for the year.
2. What adjusting entry, if an, would be made to correct the inaccurate estimates for prior
periods?
PROBLEM 6:
On January 1, 2009, COLUMBIA, INC. purchased an equipment for P650,000. The machine had an
estimated useful life of 8 years (with no residual value) at the acquisition date. On January 1,
2012, Columbia determined, as a result of additional information, that the equipment had an
estimated useful life of 10 years from the acquisition date with no residual value.
1. Prepare the journal entry, if any, to record the cumulative effect of the change on prior
years.
2. What is the amount of depreciation expense on the equipment for the year ended
December 31, 2012?
A. P65,000
C, P40,625
B. P92,850
D. P58,036
PROBLEM 7:
The following information pertains to ELIZABETH COMPANYs depreciable assets:
1. Machine X was purchased for P150,000 on January 1, 2007. The entire cost was expensed in
the year of acquisition. The estimated useful life of this machine is 15 years with no residual
value.
2. Machine Y cost P525,000 and was acquired on January 1, 2008. On the acquisition date, the
expected useful life was 12 years with no residual value. The straight-line depreciation
method was used. On January 2, 2012, it was estimated that the remaining life of the asset
would be 4 years and that there would be a P25,000 residual value.

3. A building was purchased on January 3, 2009, for P3,000,000. 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, 2012, a change was made to the sum-of-the-years-digits method of
depreciation. No change was made to the estimated useful life and residual value of the
building.
1. The adjusting entry on January 1, 2012, relative to machine X should include a credit to
A. Accumulated depreciation of P60,000
C. Machinery of P150,000
B. Retained earnings of P100,000
D. No adjusting entry is necessary
2. What is the carrying value of machine Y on January 1, 2012?
A. P350,000
C. P306,250
B. P325,000
D. P525,000
3. What is the depreciation expense on Machine Y for 2012?
A. P87,500
C. P81,250
B. P77,083
D. P41,667
4. What is the book value of the building at December 31,2011?
A. P2,185,714
C. P1,942,857
B. P2,550,000
D. P2,266,667
5. What is the book value of the building on December 31,2012?
A. P2,185,714
C. P1,942,857
B. P2,550,000
D. P2,266,667
PROBLEM 8:
HONDURAS, INC. has been using the FIFO method of inventory costing since it began
operations in 2011. In 2012, the company decided to change to the weighted average method.
The following are the December 31 inventory balances under each method.
FIFO
2011
2012

P450,000
895,000

Weighted
Average
P560,000
999,000

Prepare the entry, if any, that should be made to record the change iin inventory costing method.
Ignore income tax considerations.
PROBLEM 9:
The audited income statement of URUGUAY CO. shows a net income of P175,000 for the
year ended December 31, 2012. Adjustments were made for the following errors:
1. December 31, 2011, inventory overstated by P22,500
2. December 31, 2011, inventory understated by P37,500
3. A P10,000 customers deposit received in December 2012, was credited to sales in 2012.
The good were actually shipped in January 2013.
What is the unadjusted net income of Uruguay Co. for the year ended December 31, 2012?
A. P234,000
C. P170,000
B. P125,000
D. P200,000
PROBLEM 10:
The December 31 year ended financial statements of SANDRA COMPANY contained the
following errors:
Ending inventory
Depreciation
expense

Dec. 31, 2011

P48,000
understated
P11,500
understated

Dec. 31, 2012

P40,500
overstated
----------------

An insurance premium of P330,00 was prepaid in 2011 covering the years 2011, 2012, and 2013.
The entire amount was charged to expense in 2011. In addition, on December 31, 2012, a fully
depreciated machinery was sold for P75,000 cash, but the sale was not recorded until 2013.

There were no other errors during 2011 and 2012, and no corrections have been made for any of
the errors. Ignore income tax effects.
1. What is the total effect of the errors on Sandras 2012 net income?
A. P123,500 overstatement
C. P192,500 understatement
B. P27,500 overstatement
D. P177,500 understatement
2. What is the total effect of the errors on the amount of Sandras working capital at
December 31, 2012?
A. P75,500 overstatement
C. P225,500 understatement
B. P144,500 overstatement
D. P144,500 understatement
3. What is the total effect of the errors on the balance of Sandras retained earnings at
December 31, 2012?
A. P156,000 overstatement
C. P133,000 understatement
B. P87,000 overstatement
D. P85,000 understatement
PROBLEM 11:
The first audit of the financial statements of KABIT CO. was made for the year ended December
31, 2012. In reviewing the books, the auditor found out that certain adjustments had been
overlooked at the end of 2011 and 2012. He also discovered that other items had been
improperly recorded. These omissions and other failures for each year are summarized as
follows:

Salaries payable
Interest receivable
Prepaid insurance
Advances form
customers(1)
Equipment (2)

December
2011
2012
145,60 130,000
0
43,200
35,500
64,000
51,300
78,400
93,500
94,000

87,000

(1)

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.

(2)

Capital expenditures had been recorded as repairs but should have been charged to
equipment; the depreciation rate is 10% per year, but depreciation in the year of the
expenditure is to be recognized at 5%.

Required:
Assuming that the nominal accounts for 2012 have not yet been closed into the income
summary account, prepare all the necessary adjusting journal entries on December 31,
2012.
PROBLEM 12:
The retained earnings account of ANTONIA CORP. is reproduced below:
date
2010,
Jan 1
Dec. 31
2011, Jan
10
Mar. 6

item
Balance

RETAINED EARNINGS
Debit

Net income for the year

Dividends paid

Stock sold excess over

par
Dec. 31 Net loss for the year
2012, Jan. Dividends paid
9
Dec. 31 balance

Credit
P81,000
18,000

P15,000
32,000
11,200
15,000
89,800
P131,000

P131,0
00

The audit of the December 31, 2012, financial statements of the company reveals the following:
a) Dividends declared on December 10, 2010 ad 2011 had not been recorded in the books
until paid.

b) Improvements in buildings and equipment of P9600 had been charged to expense at the
end of April 2009. Improvements are estimated to have an 8-year life. Antonia computes
depreciation to the nearest month and uses the straight-line depreciation.
c) The physical inventory of merchandise had been understated by P3,000 at the end of
2010, and P4,300 at the end of 2011.
d) Merchandise in transit and to which the company had title ad December 31, 2011 and
2012 was not included in the year-end inventories. These shipments of P3,800 and P5,500
were recorded as purchases in January of 2012 and 2013, respectively.
e) The company had failed to record sales commissions payable of P2,100 and P1,700 at the
end of 2011 and 2012, respectively.
f) The company had failed to recognize supplies on hand of P1,200 and P2,500 at the end of
2011 and 2012, respectively.
g) The company reported a net loss of P12,400 for the year ended December 31, 2012.
1. Prepare the necessary adjusting journal entries at December 31, 2012.
2. What is the corrected net loss of ANTONIA Corp. for the year ended December 31, 2012?
A. P7,600
C. P6,000
B. P17,000
D. P16,200
PROBLEM 13:
NARUTU CO. reported the following for the first two years of operations
2010
P735,000
net income
2011
P925,000
net income
Early in 2012, the following errors were discovered:
1. Depreciation of building for 2010 were overstated by P85,000
2. Depreciation of building for 2011 was understated by P192,500
3. December 31, 2010, inventory was understated by P250,000
4. December 31, 2011, inventory was overstated by P81,000
Required:
Prepare the necessary adjusting journal entries. Assume the books are closed. Ignore income tax
considerations.
PROBLEM 14:
The following selected accounts are included in the trial balance of PALA CORP. on December 31,
2012:
Debit
Credit
Supplies on hand
P135,000
Accrued salaries payable
P75,000
Interest receivable
255,000
Prepaid insurance
4,500,00
0
Unearned rent

Accrued interest payable

750,000
Additional information is as follows:
1. A physical count of supplies on hand on December 31, 2012, totaled P55,000.
2. The accountant failed to adjust the Accrued Salaries Payable account. Accrued salaries
payable on December 31, 2012, totaled P220,000.
3. The interest Receivable account was also left unadjusted at December 31, 2012. Accrued
interest receivable on December 31, 012, amounted to P217,500.
4. The unexpired portions of the insurance policies totaled P3,250,000 as of December 31,
2012.
5. A total of P1,400,000 was received on January 1, 20121 for the rent of a building for both
2012 and 2013. The total amount received was recognized as revenue in 2012.
6. The correct amount of depreciation for the year was P2,500,000 but was erroneously
recorded as P250,000.
7. Prior years depreciation was understated by P360,000.
Required:
Prepare the necessary adjusting journal entries on December 31, 2012. Assume that the books
have not been closed.
PROBLEM 15:

You have been engaged to audit the financial statements of POMPOM CORP. for the year ended
December 31, 2012. Your audit reveals the following situations:
1. Depreciation of P16,000 for 2012 on equipment was not recorded.
2. The physical inventory count on December 31, 2011, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Pompom uses a
periodic inventory system.
3. The physical inventory count on December 31, 2012, improperly included merchandise with
a cost of P42,500 that had been recorded as a sale on December 29, 2012, and held for the
customer to pick up on January 2, 2013.
4. A collection of P28,000 on account from a customer received on December 31, 2012, was
not recorded until January 3, 2013.
5. In 2012, Pompom sold P18,500 fully depreciated equipment that originally cost P110,000.
The proceeds from the sale were credited to the Equipment account.
6. During December 2012, a computer company filed a pated infringement suit against
Pompom claiming damages of P1,000,000. The companys legal counsel has indicated that
an unfavorable outcome is probable and a reasonable estimate of the courts award to the
competitor is P600,000. The company has not reflected or disclosed this situation in the
financial statements.
7. Pompom has a portfolio of current marketable equity securities acquired in 2011 for trading
purposes. No valuation entry has been made. Information on cost and market value is as
follows:
Cost
Market
December 31, 2011
P475,000
P475,000
December 31, 2012
P475,000
P500,000
8. At December 31, 012, an analysis of payroll information shows accrued salaries of P61,000.
The Accrued Salaries Payable account had a balance of P80,000 at December 31, 2012,
which was unchanged from its balance at December 31, 2011.
9. A piece of equipment was acquired on January 2, 2012, for P160,000 and was charged to
Repairs Expense. The equipment is expected to have a useful life of 8 years and no residual
value. Pompom normally uses the straight-line method to depreciate this type of
equipment.
10.A P75,000 insurance premium paid on July 1, 2011, for a policy that expires on June 30,
2014, was charged to Insurance Expense.
11.A patent was acquired at the beginning of 2011 for P250,000. No amortization has been
recorded since its acquisition. The patent had a 10-year useful life on the date of
acquisition.
Required:
Prepare the necessary adjusting journal entries at December 31, 2012. Ignore income tax
considerations.
PROBLEM 16:
The condensed income statement of SUNRISE, INC. for the year ended December 31, 2012, is
presented below:
Sunrise, Inc.
INCOME STATEMENT
For the year ended December 31, 2012
Sales
Cost of good sold
Gross income
Operating
expenses
Net income

P1,000,000
600,000
400,000
150,000
P250,000

The December 31, 2012, audit of the companys financial statements disclosed the following
errors:
1. December 31, 2012, inventory understated P31,000
2. Accrued Expenses of P4,000 and prepaid expenses of P6,000 were nit recognized in the
companys books
3. Sales of P5,000 were not recorded until January 2013, although the goods were shipped in
December 2012, and were excluded from the December 31 physical inventory
4. Purchases of P30,000 made in December 2012, were not recorded although the goods were
received and properly included in the December 31 physical inventory

5. A machine was sold for P10,000 on July 1, 2012, and the proceeds were credited to the Sales
account. The machine was acquired on January 1, 2009 for P60,000. At that time, it had an
estimated life of 6 years with no residual value. No depreciation was recorded on this machine
in 2012
1. Prepare the necessary adjusting journal entries on December 31, 2012.
2. What is the corrected net income for the year ended December 31, 2012?
A. P228,000
C. P258,000
B. P166,000
D. P224,000
PROBLEM 17:
SILI CO. reported pretax incomes of P505,000 and P378,000 for the years ended December 31,
2011 and 2012, respectively. However, the auditor noted that the following errors had been
made:
a. Sales for 2011 included amounts of P191,000 which had been received in cash during
2011, but for which the related goods were shipped in 2012. Title did not pass to the buyer
until 2012.
b. The inventory on December 31, 2011, was understated by P43,200
c. The companys accountant, in recording interest expense for both 2011 and 2012 on
bonds payable, made the following entry on an annual basis:
Interest Expense
75,000
Cash
75,000
The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They
were issued at a discount of P75,000 on January 1, 2011, to yield an effective interest rate
of 7% .
d. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2011 and 2012. Repairs of P42,500 and P47,000 had been incurred in 20011 and
2012, respectively. In determining depreciation charges, Sili applies a rate of 10% to the
balance in the Equipment account at the end of the year.
1. What is the corrected pretax income for 2011?
A. P303,200
C. P311,700
B. P225,300
D. P307,450
2. What is the corrected pretax income for 2012?
A. P488,992
C. P484,292
B. P480,042
D. P575,382
PROBLEM 18:
BARBAS, INC. has been using the accrual basis of accounting. However, an examination of the
records reveals that some expenses and revenues have been handled on a cash basis by the
inexperienced bookkeeper of the company. Income statements prepared by the bookkeeper
reported P145,000 net income for 2011 and P185,000 net income for 2012. Further review of the
records reveals that the following items were handled improperly.
1. Rent of P6,500 was received from a lessee on December 23, 2011. It was recorded as income
at that time though the rental pertains to 2012.
2. Salaries payable on December 31 have been consistently omitted from the records of that
date and have been recorded as expenses when paid in the following year. The salary
accruals recorded in this manner were:
December 31, 2010
P5,500
December 31, 2011
7,500
December 31, 2012
4,700
3. Invoices for office supplies purchased have been charged to expense accounts when
received. Inventories of supplies on hand at the end of each year have been ignored, and no
entry has been made for them.
December 31, 2010
P6,500
December 31, 2011
3,700
December 31, 2012
7,100
1. What is the corrected net income for 2014?
A. P133,700
C. P146,700
B. P144,200
D. P139,300
2. What is the corrected net income for 2012?
A. P184,700
C. P185,600

B. P197,700

D. P190,900

PROBLEM 19:
BARTEK CO. is in the process of obtaining a loan at Metropolis Bank. The bank has requested
audited financial statements. Barteks financial statements have never been audited before. It
has prepared the following comparative financial statements for the year ended December 31,
2012 and 2011.
Bartek Co.
COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2012 and 2011
Assets
2012
2011
Current Assets:
Cash and cash equivalents
P1,205,00
P800,000
0
Accounts Receivable
1,960,000
1,480,000
Allowance for bad Debts
(185,000)
(90,000)
Inventory
1,035,000
1,010,000
Total Current Assets
4,015,000
3,200,000
Noncurrent Assets:
Property, plant, and equipment
835,000
847,500
Accumulated Depreciation
(608,000)
(532,000)
Total noncurrent Assets
227,000
315,500
Total Assets
P4,242,0 P3,515,50
00
0
Liabilities and shareholders equity
Liabilities:
Accounts Payable
P607,000
Shareholders Equity:
Ordinary shares, P20 par
value;
150,000 shares authorized;
65,000 shares issued and
1,300,000
outstanding
Retained Earnings
2,335,000
Total shareholders Equity
3,635,000
Total Liabilities and Shareholders
P4,242,0
equity
00

P980,500

1,300,000
1,235,000
2,535,000
P3,515,50
0

Bartek Co.
COMPARATIVE INCOME STATEMENTS
For the Year Ended December 31, 2012 and 2011
2012
2011
Sales
P5,000,000
P4,500,000
Cost of Goods Sold
2,150,000
1,975,000
Gross Income
2,850,000
2,525,000
Operating Expenses:
Selling Expenses
1,150,000
1,025,000
Administrative
600,000
525,000
Expenses
1,750,000
1,550,000
Total Operating
Expenses
Net Income
P1,100,000
P975,000
The 2012 audit revealed the following facts:
A. On January 5, 2011, Bartek had charged a 5-year insurance premium to expense. The
premium totaled P31,000
B. The amount of loss due to bad debts has steadily decreased over the last 2 years. Bartek
has decided to reduce the amount of bad debt expense from 2% to 1 % of sales,
beginning with 2012. (A charge of 2% has already been made for 2012.)
C. Senegal uses the periodic inventory system. The following are the inventory errors for the
last 2 years.
2011
ending inventory overstated by P75,500

2011
ending inventory overstated by P99,000
D. An equipment costing P150,000 was acquired on January 3, 2011. The purchase was
recorded by a charge to operating expense. The equipment has a useful life of 10 years and
a residual value of P25,000. Bartek uses the straight-line method in depreciating its assets.
1. Prepare the adjusting journal entries to correct the books at December 31, 2012. Assume that
the books for 2012 have not yet been closed.
2. What is Barteks corrected net income for the year ended December 31, 2011?
A. P1,012,200
C. P786,800
B. P1,212,800
D. P1,061,800
3. What is Barteks corrected net income for the year ended December 31, 2012?
A. P1,095,200
C. P1,082,800
B. P1,126,800
D. P1,107,800
PROBLEM 20:
In the course of your examination of the December 31, 2012, financial statements of DIONISIA
COMPANY, you discovered certain errors that had occurred during 2011 and 2012. No errors were
corrected during 2011. The errors are summarized below:
1. Beginning merchandise inventory (January 1, 2011) was understated by P259,200
2. Merchandise costing P72,000 was sold for P120,000 no Naval Company on December 28,
2011, but the sale was recorded in 2012. The merchandise was shipped FOB shipping point
and was not included in ending inventory. Dionisia uses a periodic inventory system.
3. A Two-year fire insurance was purchased on mat 1, 2011, for P172,800. The whole amount
was charged to Prepaid Insurance. No adjusting entry was prepared in 2011 and 2012.
4. A one yea note receivable of P288,000 was held by Dionisia beginning October 1, 2011.
Payment of the 10% note and accrued interest was received upon maturity. No adjusting
entry was made on December 31, 2011.
5. Equipment with a 10-year life was purchased on January 1, 2011, for P1,176,000. No
depreciation expense was recorded during 2011 or 2012. Assume that the equipment has no
residual value and that Dionisia uses the straight-line method fr recording depreciation.
Required:
Prepare journal entries to correct each of the errors described above. Assume that the nominal
accounts for 2012 have not yet been closed into the income summary account.