Chapter 2

Misstatements in the Financial Statements

Problem 1
Under(Over) statement in Profit of Retained
Nature of error Earnings 2015 Accounts Affected
01/01/15
2013 2014 2015 Account Dr. Cr.
Omission of prepaid
expenses
12/31/13
12/31/14 Expenses
12/31/15 Prepaid expenses
Expenses
Omission of unearned
revenue:
12/31/13
12/31/14 Revenue
12/31/15 Revenue
Unearned revenue
Omission of accrued
expenses:
12/31/13
12/31/14 Expenses
12/31/15 Expenses
Accrued expenses
Omission of accrued
revenues
12/31/13
12/31/14 Revenues
12/31/15 Accrued revenues
Revenues
Net
under(over)statement 24,000 ( 2,000) 11,000 22,000
Reported profit(loss) 240,000 (120,000) 200,000
Corrected profit(loss) 264,000 (122,000) 211,000

Problem 2

1. A 2. A 3. D 4. D 5. B

Problem 2
1. Retained Earnings
Wages Expense

2. Interest Income
Retained Earnings

3. Insurance Expense 20,000

Prepaid Insurance 20,000
Retained Earnings 40,000

4. Supplies Expense 25,000

Retained Earnings 25,000

Unused Supplies 28,000

Supplies Expense 28,000
 5. Retained Earnings 80,000
Accumulated Amortization Development Cost 80,000
Capitalized Development Cost 120,000
Amortization Expense Development Cost 40,000

6. Retained Earnings 80,000

Service Revenue 40,000
Unearned Service Revenue 40,000

7. Retained Earnings
Rent Revenue

8. Office Equipment 1,500,000

Depreciation Expense - Equipment 300,000
Accumulated Depreciation 900,000
Retained Earnings 900,000

Problem 3

(Function of Expense Method)

1. Cost of Goods Sold
Retained Earnings

2. Cost of Goods Sold

Inventory

3. Retained Earnings
Cost of Goods Sold

4. No entry ( no effect on cost of sales and profit of both 2014 and 2015; as both beginning inventory and purchases
in 2015 had been transferred to cost of sales)

5. Cost of Goods Sold

Retained Earnings

6. Sales
Retained Earnings

Problem 5 (Dragon Ball Company)

(1) Schedule to compute correct profit:

Under(over)statement in Profit
2013 2014 2015 RE, 1/1/15
Omission of accrued wages
12/31/13
12/31/14
12/31/15
Omission of unused supplies
12/31/13
12/31/14
12/31/15
Omission of accrued interest income
12/31/13
Sale of equipment - Proceeds
Gain on sale
Recorded depreciation
Omission of unearned rent
Net under(over)statement (43,800) (800) (56,400) (44,600)
Reported Profit 450,000 290,000 440,000
Corrected Profit 406,200 289,200 383,600

(2) Audit adjusting entries:

Retained Earnings
Wages Expense

Wages Expense
Wages Payable

Supplies Expense
Retained Earnings

Unused Supplies
Supplies Expense

Retained Earnings 9,600

Accumulated Depreciation 36,600
Equipment 42,000
Depreciation Expense 4,200

(3) Correcting entries in 2016

Retained Earnings
Wages Expense

Supplies Expense
Retained Earnings

Retained Earnings 5,400

Accumulated Depreciation 36,600
Equipment 42,000

Problem 6 (Erasure Company)

1. Accumulated Depreciation 27,500

Depreciation Expense 9,167
Retained Earnings 18,333

2. Retained Earnings
Salaries Expense

3. Loss on Damages
Retained Earnings

4. Goodwill 24,000
Accumulated Amortization GW 24,000
 Retained Earnings 12,000
Amortization of Goodwill 12,000
Accumulated Amortization Goodwill 24,000
(Note: SMEs amortize Goodwill over ten years )

5. Sales
Advances from Customers

6. Retained Earnings 54,000

Accumulated Depreciation 6,000
Equipment 60.000

Repairs and Maintenance

Equipment

Accumulated Depreciation (10% x (60,000+ 50,000)

Depreciation Expense

7. Cost of Sales
Retained Earnings

Cost of Sales
Inventory

8. No entry ( no effect on cost of sales of 2014 and 2015; Cost of sales had been set up; both purchases and
beginning inventory for 2015 had been transferred to cost of sales)

Problem 7 (Gloria Company)

Audit adjustments to correct 2014 financial statements Audit adjustments to correct 2015 financial statements

Other operating income Retained earnings

Unearned commission income Other operating income

Other operating income

Unearned commission income

Prepaid rent Selling and administrative expenses

Selling and administrative expenses Retained earnings

Prepaid rent
Selling and administrative expenses

Interest receivable Other operating income

Other operating income Retained earnings

Interest receivable
Interest income

Sales
Advances from customers

Cost of sales Retained earnings

Accounts payable Cost of sales
Equipment Equipment 20,000
Selling and administrative expenses Retained earnings 18,000
Accumulated depreciation 2,000

Selling and administrative expenses Selling and administrative expenses

Accumulated depreciation Accumulated depreciation

(a)
Gloria Company
Comparative Statements of Comprehensive Income
For the Years Ended December 31, 2015 and 2014

2015 2014
Sales P 910,000 P 720,000
Cost of Sales 585,000 465,000
Gross Profit P 325,000 P 255,000
Other Operating Income 73,600 30,000
Total Income P 398,600 P 285,000
Less: Selling and Administrative Expenses 279,000 156,000
Net Income from Operations P 119,600 P 129,000
Interest Expense 80,000 20,000
Net Income P 39,600 P 109,000

(b) Effect on total assets, December 31, 2014 (see audit adjusting entries for 2014)
= 16,000 + 8,000 + 20,000 2,000 = P42,000 understated

(c) Effect on total assets, December 31, 2015 (see audit adjusting entries for 2015)
= 21,000 + 12,000 + 20,000 2,000 4,000 = P47,000 understated.

(d) Effect on total liabilities, December 31, 2015 (see audit adjusting entries for 2015)
= 6,400 + 90,000 = 96,400 understated

Problem 8 Golden Crest

Particulars 2014 Profit Retained earnings, Non- current Retained earnings

Dec. 31, 2014 Assets, 12/31/15 January 1, 2014
Omission of unused supplies
12/31/14
12/31/15
Repairs charged to equipment on 1/1/13
AFS securities were measured at cost
Correct cost of equipment, P746,070
Recorded cost 900,000
Difference 153,930
Difference in depreciation
2014 153,930 x 10% x 3/13 = 3,848
2015 153,930 / 10 = 15,393
Interest expense
2014 P74,607 x 3/13 =
Net under (overstatement) (6,504) (67,804) (144,189) (76,500)

Present value of the note on October 1, 2014 = 300,000 x 2.4869 = 746,070

Amortization table for the note payable
Date Periodic Payment Applied to Interest Applied to Principal Bal. of Principal
October 1, 2014 746,070
September 30, 2015 520,677
September 30, 2016 272,745

Problem 9 (Golden Harvest Corporation)

(a) Computation of correct profit (loss)
Particulars 2014 2015 2016
Omissions of
Accrued expenses, 12/31/14
12/31/15
12/31/16
Accrued income 12/31/14
12/31/15
12/31/16
Prepaid expenses 12/31/14
12/31/15
12/31/16
Unearned income 12/31/14
12/31/15
12/31/16
Omission in the ending inventory
2015
2016
Machine charged to expense on August 31, 2014
Depreciation on the machine
Net understatement (overstatement) 85,667 22,000 25,000
Reported profit (loss) (250,000) 320,000 380,000
Correct profit (loss) 164,333 342,000 405,000

Computation of retained earnings

2014 2015 2016
Balance, January 1 P 0 P(164,333) P117,667
Profit (loss)
Dividends declared
Balance, December 31 P(164,333) P117,667 422,667

(b) 2016 Audit Adjusting Entries

Retained Earnings
Operating Expenses

Operating Expenses
Accrued Expenses

Income
Retained Earnings

Accrued Income
Income
 Expenses
Retained Earnings

Prepaid Expenses
Expenses

Retained Earnings
Income

Income
Unearned Income

Inventory, beginning/Cost of Sales

Retained Earnings

Inventory, end
Income Summary/ Cost of Sales

Machinery 80,000
Operating Expenses 10,000
Retained Earnings 66,667
Accumulated Depreciation 23,333

Problem 10 (Sukiyaki Corporation)

Audit Adjustments to restate 2014 FS Audit Adjustments to Restate 2015 FS

Allowance for Doubtful Accounts 5,000
Operating Expenses 5,000
32,000 37,000 = 5,000

Other Operating Expenses Unrealized Held for Trading Equity Securities 7,000
Loss on Trading Sec. 3,000 Retained Earnings 3,000
Held for Trading Equity Securities 3,000 Other Operating Income
Unrealized Gain on Trading Sec. 10,000
Cost of Sales 8,900 Retained Earnings 8,900
Merchandise Inventory 8,900 Cost of Sales 8,900

Cost of Sales 13,600

Merchandise Inventory 13,600

Equipment 36,000 Equipment 36,000

Operating Expenses 36,000 Retained Earnings 36,000

Operating Expenses 3,000 Retained Earnings 3,000

Accumulated Depreciation 3,000 Operating Expenses 3,000
(36,000 -6,000)/13 Accumulated Depreciation 6,000

Accumulated Depreciation 20,000

Equipment 17,000
Other Operating Income
Gain on Sale of Equipment 3,000

Prepaid Insurance 6,000 Prepaid Insurance 3,000

Operating Expenses 3,000 Operating Expenses 3,000
Retained Earnings 9,000 Retained Earnings 6,000
 Sukiyaki Corporation
Statement of Comprehensive Income
For the Years Ended December 31, 2015 and 2014

2015 2014
Sales P1,000,000 P900,000
Cost of Sales 434,700 403,900
Gross Profit P 565,300 P 496,100
Gain on Sale of Equipment 3,000
Unrealized Gain on Trading Securities 10,000
Total Income 578,300 496,100
Operating Expenses (351,000) (280,000)
Unrealized Loss on Trading Securities (3,000)
Profit P227,300 P 213,100

Sukiyaki Corporation
Statement of Financial Position
December 31, 2015 and 2014

2015 2014

Current Assets
Cash P183,000 P 2,000
Held for Trading Equity Securities 85,000 75,000
Accounts Receivable, net 360,000 278,000
Merchandise Inventory 193,400 193,100
Prepaid Expenses 3,000 6,000
Total Current Assets P 824,400 P554,100
Non-Current Assets
Property, Plant and Equipment, net of Acc. Deprn P 78,400 P 96,100
Total Assets P902,800 P650,200

Current Liabilities
Accounts Payable P121,400 P196,100

Shareholders Equity
Ordinary Share P260,000 P180,000
Share Premium 20,000 0
Retained Earnings 501,400 274,100
Total Shareholders Equity P781,400 P 454,100
Total Liabilities and Shareholders Equity P902,800 P650,200

Cash Flow Statement

For the Year Ended December 31, 2015

Cash Flow From Operating Activities

Collection from customers P904,000
Payment to Suppliers (509,700)
Payment for expenses (315,800)
Net cash flow from operations P78,500
Cash Flow From Investing Activities
 Sale of equipment P 3,000
Purchase of equipment ( 500)
Net cash flow from investing activities 2,500
Cash Flow From Financing Activities
Issue of ordinary share (80,000 + 20,000) 100,000
Increase in cash P181,000
Cash Balance, January 1, 2015 2,000
Cash Balance, December 31, 2015 P183,000

Computations: 2015 2014

Accounts Receivable P392,000 P296,000
Allowance for Uncollectible Accounts 32,000 18,000
AR, Net P360,000 P278,000

Property, Plant and Equipment

Cost P186,000 P205,500
Accumulated Depreciation 107,600 109,400
Carrying value P 78,400 P 96,100

Accounts Receivable, beg. P296,000

Sales 1,000,000
Accounts Receivable, end (392,000)
Collections from customers P904,000

Inventory, end P193,400

Cost of sales 434,700
Inventory, beg. (193,400)
Purchases P434,700
Accounts Payable, beginning 196,100
Accounts Payable, end (121,400)
Payment to suppliers P509,700

Accumulated depreciation, end P107,600

Accumulated depreciation of equipment sold 20,000
Accumulated depreciation, beg. (109,400)
Depreciation expense P18,200

Operating expenses P351,000

Depreciation ( 18,200)
Doubtful accounts expense 32,000 18,000 ( 14,000)
Decrease in prepaid expenses ( 3,000)
Operating expenses paid P315,800

Property, Plant and Equipment, cost, end P186,000

Cost of equipment sold 20,000
Property, plant and equipment, cost, beg. (205,500)
Equipment purchased P 500
Problem 11 (Tahoma Corporation)

Adjusting Entries December 31, 2015

Sales
Retained Earnings

Accounts Receivable
Sales

Retained Earnings
Purchases

Purchases
Accounts Payable

Sales
Unearned Revenue

Retained Earnings
Sales

Retained Earnings
Expenses

Expenses
Accrued Expenses

Inventory, beginning
Retained Earnings

Inventory, end
Income Summary

Advances to Suppliers
Purchases

Retained Earnings 3,333

Expenses 10,000
Accumulated Depreciation Printing Equipment 13,333

Expenses 37,500
Retained Earnings 12,500
Accumulated Depreciation Building 50,000

Expenses
Allowance for Uncollectible Accounts

Interest Expense (500,000 x 12% x 8/15) 40,000

Retained Earnings (500,000 x 12% x 4/15) 20,000
Operating Expenses 60,000
(Note: 2 semi-annual payments were made in 2015; both were charged to operating expenses, balance of Mortgage
payable before the annual payment in August 2015 is 450,000 + 50,000)
Interest Expense 18,000
Interest Payable 18,000
450,000 x 12% x 4/15

Tahoma Company Statement of

Comprehensive Income For the Year
Ended December 31, 2015

Sales P 2,076,000
Cost of Sales
Inventory, January 1
Purchases
Inventory, Dec. 31
Cost of Sales 880,000
Gross Profit
Selling and Administrative Expenses
Profit before interest expense
Interest expense
Profit 361,500

Tahoma Company Statement of

Financial Position December
31, 2015

Assets
Current Assets
Cash
Accounts receivable, net of allowance for uncollectible accounts of P24,000
Advances to suppliers
Inventory
Total current assets P1,126,000
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 P2,312,667
Liabilities and Shareholders Equity
Current Liabilities
Accounts payable
Accrued expenses
Current portion of mortgage payable
Interest payable
Unearned revenue
Total current liabilities P278,000

Non-current liabilities
Mortgage payable, net of current portion P 400,000
Total liabilities

Shareholders Equity
Ordinary share capital
Retained earnings *634,667
 Total shareholders equity P 1,634,667
Total liabilities and shareholders equity P2,312,667

*Retained earnings, January 1, 2015 before adjustment P 300,000

Correction of prior period errors
Profit for 2015
Retained earnings, December 31, 2015 P 634,667

Multiple Choice

1. A
2. C
3. A
4. A
5. B
6. A
7. A
8. B
9. B
10. D
11. B
12. B
13.. C
14. B
15. A

16. D
17. C
18. C
19 A
20. A