Chapter 2

Correction of Errors
PROBLEM 1
12/31/17 Assets 2017 Profit 12/31/18 Assets 2018 Profit
1. U U U O
2. O U O U
3. U U U O
4. U U U NE
5. U O U O
*Illustration below is for discussion purpose only
**Account titles are not specific bec. the problem required only to take into effect the 2017 and 2018 Assets and
Profit

Correct Entry Per Client Interpretation

1. Assume, Expense = 100,000

Year 2017 Year 2017 2017 Asset

Understated by 80,000
1/1 Equipment 100,000 1/1 Expense 100,000
Cash 100,000 Cash 100,000 2017 Profit
Overstated Expense by 80,000
12/31 Dep exp 20,000 12/31 -no entry- therefore Understated Profit by
Acc Dep 20,000 80,000
Year 2018
Year 2018 2018 Asset
12/31 Dep exp 20,000 12/31 -no entry- Understated by 60,000
Acc Dep 20,000
2018 Profit
Understated expense by 20,000
Overstated profit by 20,000

2. *Training costs are not

Year 2016 Year 2016 capitalizable; they are period costs

1/1 Expense 30,000 1/1 Asset 30,000 2017 Asset

Cash 30,000 Cash 30,000 Overstated by 18,000
12/31 Exp 6,000
Year 2017 Acc. Amort(Asset) 6,000 2017 Profit
12/31 -no entry- Overstated Expense by 6,000
Year 2017 therefore Understated Profit by 6,000

12/31 Exp 6,000 2018 Asset

Year 2018 Acc. Amort(Asset) 6,000 Overstated by 12,000

12/31 -no entry Year 2018 2018 Profit

Overstated Expense by 6,000
12/31 Exp 6,000 therefore Understated Profit by 6,000
Acc. Amort(Asset) 6,000
 Chapter 2
Correction of Errors

3.* *Assuming Qualifying Asset = 40,000

Year 2017 Year 2017 2017 Asset

Understated by 39,000
1/1 Qualifying Asset 40,000 1/1 Expense 40,000
Cash1 40,000 Cash 40,000 2017 Profit
Overstated expense by 39,000
12/31 Dep exp 1,000 12/31 -no entry- therefore Understated profit by
Acc Dep 1,000 39,000

Year 2018 Year 2018

12/31 Dep exp 1,000 2018 Asset
Acc Dep 1,000 12/31 -no entry- Understated by 38,000

2018 Profit
Understated Expense by 1,000
therefore Overstated Profit by 1,000

4. Assume
Land bought for parking lot = Land
improvement
Useful Life = 10 years

Year 2017 Year 2017 2017 Asset

1/1 Land Improvement 120,000 Understated by 108,000
Cash 120,000 1/1 Expense 120,000
Cash 120,000 2017 Profit
12/31 Dep. Exp 12,000 Overstated expense by 108,000
Acc. Dep 12,000 12/31 -no entry- therefore
Understated profit by 108,000
Year 2018
12/31 Dep exp 12,000 Year 2018 2018 Asset
Acc Dep 12,000 Understated by 96,000
12/31 -no entry-
2018 Profit
Understated Expense by 12,000
therefore
Overstated Profit by 12,000

*After the land is purchased, it must be

leveled and graded for drainage.
Concrete or blacktop can then be
poured over the dirt and line can be
painted for parking spots. Like all land
improvements, a parking lot has a
limited life. And should therefore be
Depreciated annually.
 Chapter 2
Correction of Errors

Assume
Land bought for parking lot was not Year 2017 2017 Asset
treated as Land Improvements but as Understated by 120,000
Land. 1/1 Expense 120,000
Cash 120,000 2017 Profit
Year 2017 Overstated expense by 120,000
1/1 Land 120,000 12/31 -no entry- therefore Understated profit by
Cash 120,000 120,000

12/31 -no entry- Year 2018

2018 Asset
12/31 -no entry- Understated by 120,00

Year 2018 2018 Profit

12/31 -no entry- No Effect

5. Assume
Useful Life = 5 years
FV of Dismantling Cost after 5 yrs =
133,815
Discount Rate = 6%

Year 2017 Year 2017 2017 Asset

1/1 1/1 Understated by 80,000
Equipment 500,000 Equipment 500,000
Cash 500,000 Cash 500,000 2017 Profit
Understated expense by 26,000
Equipment 100,000 -no entry- therefore Overstated profit by 26,000
PFDC 100,000

12/31 12/31
Depreciation 120,000 Depreciation 100,000
Acc. Dep 120,000 Acc. Dep 100,000

Interest Expense 6,000 -no entry-

PFDC 6,000

Year 2018 Year 2018 2018 Asset

12/31 12/31 Understated by 60,000
Depreciation 120,000 Depreciation 100,000
Acc. Dep 120,000 Acc. Dep 100,000 2018 Profit
Overstated Expense by 26,360
Interest Expense 6,360 -no entry- therefore
PFDC 6,360 Understated Profit by 26,360

Legend
PFDC= Provision for Dismantling Cost
 Chapter 2
Correction of Errors

Problem 2
Under(Over) statement in Profit of Retained
Nature of error Earnings 2018 Accounts Affected

2016 2017 2018 01/01/18 Account Dr. Cr.

Omission of prepaid
expenses
12/31/16 29,000 (29,000)
12/31/17 30,000 (30,000) 30,000 Expenses 30,000
12/31/18 34,000 Prepaid expenses 34,000
Expenses 34,000
Omission of unearned
revenue:
12/31/16 (20,000) 20,000
12/31/17 (28,000) 28,000 (28,000) Revenue 28,000
12/31/18 (15,000) Revenue 15,000
Unearned revenue 15,000
Omission of accrued
expenses:
12/31/16 (27,500) 27,500
12/31/17 (25,000) 25,000 (25,000) Expenses 25,000
12/31/18 (27,000) Expenses 27,000
Accrued expenses 27,000
Omission of accrued
revenues
12/31/16 42,500 (42,500)
12/31/17 45,000 (45,000) 45,000 Revenues 45,000
12/31/18 41,000 Accrued revenues 41,000
Revenues 41,000
Net
under(over)statement 24,000 ( 2,000) 11,000 22,000
Reported profit(loss) (120,000) 100,000 200,000
Corrected profit(loss) (96,000) 98,000 211,000

2018 Adjusting Journal Entries

a. c.
Expenses 30,000 Expense 27,000
Retained Earnings 30,000 Acc. Expense 27,000

Prepaid Expenses 34,000 Retained Earnings 25,000

Expenses 34,000 Expense 25,000

b. d.
Retained Earnings 28,000 Acc. Rev 41,000
Revenue 28,000 Income 41,000

Revenue 15,000 Revenue 45,000

Unearned Revenue 15,000 Retained Earnings 45,000
 Chapter 2
Correction of Errors
Problem 3

Correct Entry Per Client 2018 Adjusting Entry

1. Year 2017 Year 2017
Wages Expense 160,000 -no entry- Retained Earnings 160,000
Acc. Expense 160,000 Wages Expense 160,000

Year 2018 Year 2018

Acc. Expense 160,000 Wages Expense 160,000
Cash 160,000 Cash 160,000

2. Year 2017 Year 2017 None

Interest Receivable 48,000 -no entry-
Unearned. Revenue 48,000

Year 2018 Year 2018

Unearned Revenue 48,000 Cash 48,000
Interest Income 48,000 Interest Income 48,000
Cash 48,000
Interest Receivable 48,000

3. Year 2017 Year 2017 Prepaid Insurance 25,000

Prepaid Insurance 60,000 -No entry- Insurance Expense 20,000
Cash 60,000 Retained Earnings 45,000

Insurance Expense 15,000 Insurance Expense 60,000

Prepaid Insurance 15,000 Cash 60,000

Year 2018 Year 2018

Insurance Expense 20,000 -No entry-
Prepaid Insurance 20,000
4. Year 2017 Year 2017 Unused Supplies 25,000
Unused Supplies 45,000 Supplies Expense 45,000 Retained Earnings 25,000
Cash 45,000 Cash 45,000
Supplies Expense 20,000 Unused supplies 28,000
Unused Supplies 20,000 Year 2018 Supplies Expense 28,000
Year 2018 Supplies Expense 52,000
Supplies Expense 52,000 Cash 52,000
Cash 52,000
Unused Supplies 28, 000
Supplies Expense 28,000

5. Year 2017 Year 2017 Retained Earnings 120,000

1/1 1/1 Intangible Asset 120,000
R&D Expense 120,000 Intangible Asset 120,000
Cash 120,000 Cash 120,000 Acc. Amort. 40,000
12/31 Amort. Exp. 40,000
12/31 Amortization Expense 40,000
-no entry- Acc. Amortization 40,000 Acc. Amort 40,000
Year 2018 Year 2018 Retained Earnings 40,000
12/31 Amortization Expense 40,000
-no entry- Acc. Amortization 40,000

6. Year 2017 Year 2017 Retained Earnings 93,333

5/1 5/1 Unearned Service Rev. 53,333
Cash 120,000 Cash 120,000 Service Revenue 40,000
Service Revenue 120,000 Service Revenue 120,000
 Chapter 2
Correction of Errors
12/31 12/31
Service Rev. 93,333 -none-
Unearned Service Rev 93,333 Year 2018
Year 2018 -none-
Unearned Service Rev. 40,000
Service Revenue 40,000

7. Year 2017 Year 2017 Retained Earnings 36,000

Cash xx Cash xx Rent Income 36,000
Rent Income xx Rent Income xx
Rent Income 36,000
Unearned Rent 36,000 -no entry-

Year 2018 Year 2018

Unearned Rent 36,000 -no entry-
Rent Income 36,000

8. Year 2016 Year 2016

1/1 1/1 PPE 1,500,000
PPE 1,500,000 Maintenance Exp. 1,500,000 Retained Earnings 1,500,000
Cash 1,500,000 Cash 1,500,000
12/31 Year 2017 Retained Earnings 600,000
Dep. Exp 300,000 -No entry- Acc. Dep 600,000
Acc. Dep 300,000
Year 2017 Year 2018 Dep Exp 300,000
12/31 -No entry- Acc. Dep. 300,000
Dep. Exp 300,000
Acc. Dep 300,000 or
Year 2018 Compound entry:
12/31
Dep. Exp 300,000 PPE 1,500,000
Acc. Dep 300,000 Dep. Exp 300,000
Acc. Dep 900,000
RE 900,000
 Chapter 2
Correction of Errors

Problem 4
(Function of Expense Method)

Per Audit Per Client 2018 Adjusting Entry

1. Assume Year 2017 Compound entry
Merch Inv. understated is 10,000 -no entry- CGS 10,000
Retained Earnings 10,000
Year 2017 or
MI end. 10,000 Year 2018
CGS 10,000 MI beg. 10,000
-no entry- Retained Earnings 10,000
Year 2018 CGS 10,000
CGS 10,000 MI,Beg 10,000
MI, Beg. 10,000

2. Year 2018 Year 2018 2018 AJE

CGS xx -no entry- CGS xx
MI, end xx MI,end xx

*Assuming error was discovered in

2019
2019 AJE
RE beg xx
CGS xx

3. RE beg. xx
Purchase xx
4. Year 2018 Year 2018 2018 AJE
CGS/Purch xx -no entry- CGS /Purch xx
AP xx AP xx

Mi, end xx -no entry- MI,end xx

CGS xx CGS xx

5. Year 2017 Year 2017 Merch Inv. xx

Purch xx Purch xx Retained Earnings xx
AP xx AP xx

MI xx -no entry-
CGS xx
6. Year 2017 Year 2017
A/R xx -No entry- Sales xx
Sales xx Retained Earnings xx
 Chapter 2
Correction of Errors
Problem 5
(1) Schedule to compute correct profit:

Under(over)statement in Profit
2016 2017 2018 RE, 1/1/18
Omission of accrued wages
12/31/16 (80,000) 80,000
12/31/17 (60,000) 60,000 (60,000)
12/31/18 (78,000)
Omission of unused supplies
12/31/16 32,000 (32,000)
12/31/17 25,000 (25,000) 25,000
12/31/18 22,400
Omission of accrued interest income
12/31/17 18,000 (18,000) 18,000
Sale of equipment - Proceeds (25,000)
Gain on sale 7,000
Recorded depreciation 4,200 4,200 4,200 (9,600)
Omission of unearned rent (40,000)
Net under(over)statement (61,800) 35,200 (74,400) (26,600)
Reported Profit 450,000 290,000 440,000
Corrected Profit 388,200 325,200 365,600

(2) Audit adjusting entries:

Retained Earnings 60,000

Wages Expense 60,000

Wages Expense 78,000

Wages Payable 78,000

Supplies Expense 25,000

Retained Earnings 25,000

Unused Supplies 22,400

Supplies Expense 22,400

Interest Income 18,000

Retained Earnings 18,000

Retained Earnings 9,600

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

(3) Correcting entries in 2019

Retained Earnings 78,000

Wages Expense 78,000

Supplies Expense 22,400

Retained Earnings 22,400
 Chapter 2
Correction of Errors
Retained Earnings 5,400
Accumulated Depreciation 36,600
Equipment 42,000

Problem 6

Correct Entry Per Client 2018 Adjusting Entry

1. Year 2016 Year 2016
1/1 1/1
Equipment 550,000 Equipment 550,000
Cash 550,000 Cash 550,000
12/31 12/31
Depreciation Expense 82 500 Depreciation Expense 91,667
Acc. Dep. 82 500 Acc. Dep. 91,667

Year 2017 Year 2017

12/31 12/31
Depreciation Expense 82 500 Depreciation Expense 91,667 Acc. Dep 18,334
Acc. Dep. 82 500 Acc. Dep. 91,667 RE, beg 18,334

Year 2018 Year 2018

12/31 12/31
Depreciation Expense 82 500 Depreciation Expense 91,667 Acc. Dep 9,167
Acc. Dep. 82 500 Acc. Dep. 91,667 Dep Exp 9,167

2. Year 2017 Year 2017

Salaries Expense 65 000 -no entry- RE, beg. 65 000
Salaries Payable 65 000 Salaries Payable 65 000

Year 2018 Year 2018

Salaries Payable 65 000 Salaries Expense 65 000 Salaries Payable 65 000
Cash 65 000 Cash 65 000 Salaries Expense 65 000

3. Year 2017 Year 2017

Loss on damages 450 000 Loss on damages 450 000
Provision for damages 450 000 Provision for damages 450 000

Year 2018 Year 2018

Provision for damages 450 000 Provision for damages 450 000 Loss on damages 135 000
Loss on damages 135 000 Retained Earnings 135 000 Retained Earnings 135 000
Cash 585 000 Cash 585 000

4. Year 2017 Year 2017

1/1 1/1
Goodwill 240 000 Goodwill 240 000
Cash 240 000 Cash 240 000
12/31 12/31
Amortization Expense 24 000 Amortization Expense 12 000 Goodwill 12 000
Accumulated Amort. 24 000 Goodwill 12 000 RE, beg. 12 000
Accumulated Amort. 24 000
 Chapter 2
Correction of Errors
Year 2018
Amortization Expense 24 000 Year 2018 Goodwill 12 000
Accumulated Amort. 24 000 Amortization Expense 12 000 Amortization Expense 12 000
Goodwill 12 000 Accumulated Amort. 24 000

(Note: SMEs amortize Goodwill

over ten years )

5. Year 2018 Year 2018

Cash 340 000 Cash 340 000 Sales 340 000
Advances fr. customers 340 000 Sales 340 000 Advances fr. customers 340 000

6. Year 2017 Year 2017

Expense 60 000 Equipment 60 000 RE, beg. 60 000
Cash 60 000 Cash 60 000 Equipment 60 000
Depreciation Expense 6 000 Acc. Dep. 6 000
Acc. Dep. 6 000 RE, beg. 6 000
Year 2018 Year 2018
Expense 50 000 Equipment 50 000 Expense 50 000
Cash 50 000 Cash 50 000 Equipment 50 000
Depreciation Expense 11 000 Acc. Dep. 11 000
Acc. Dep. 11 000 Depreciation Exp. 11 000

7. Year 2016 Year 2016 Merch. Inv. 42 000

Merchandise Inventory 42 000 -no entry- RE, beg. 42 000
CGS 42 000 RE, beg. 42 000
Merch. Inv. 42 000

Year 2017 Year 2017 Merch. Inv. 51 000

Merchandise Inventory 51 000 RE, beg. 51 000
CGS 51 000 -no entry- CGS 51 000
Merch. Inv. 51 000

Year 2018 Year 2018

CGS 30 000 -no entry- CGS 30 000
Merchandise Inventory 30 000 Merch. Inv. 30 000

8. Year 2017 Year 2017

Purchases 153 000 -no entry- -no entry-
Accounts Payable 153 000

Year 2018 Year 2018 -no entry-

A/P 153,000 Purchases 153,000
Cash 153,000 Cash 153,000
 Chapter 2
Correction of Errors
Problem 7
2017 AUDIT AJE 2018 AUDIT AJE
Commission Income 8,000 Retained Earnings 8,000
Unearned Commission Income 8,000 Commission Income (OI) 8,000
Commission Income(OI) 6,400
Unearned Commission Income 6,400
Prepaid Rent 16,000 Rent Expense(SAE) 16,000
Rent Expense 16,000 Retained Earnings 16,000

Prepaid Rent 21,000

Rent Expense(SAE) 21,000
Interest Receivable 8,000 Interest Income(OI) 8,000
Interest Income 8,000 Retained Earnings 8,000
Interest Receivable 12,000
Interest Income (OI) 12,000
Wages Expenses 25,000 Retained Earnings 25,000
Wages Payable 25,000 Wages Expense(SAE) 25,000
Wages Expenses(SAE) 22,000
Wages Payable 22,000
Sales 90,000
Advances from customers 90,000
Accounts Payable 15,000 COGS(Purch) 15,000
COGS/Purchases 15,000 Retained Earnings 15,000
Equipment 20,000 Equipment 20,000
Expense 20,000 Dep. Exp (SAE) 4,000
Depreciation Exp. 2,000 Acc. Dep 6,000
Acc Dep 2,000 Retained Earnings 18,000
 Chapter 2
Correction of Errors
(a)
Gloria Company
Comparative Statements of Comprehensive Income
For the Years Ended December 31, 2018 and 2017

2018 2017
Sales P 910,000 P 720,000
Cost of Sales 615,000 435,000
Gross Profit P 295,000 P 285,000
Other Operating Income 85,600 30,000
Total Income P 380,600 P 315,000
Less: Selling and Administrative Expenses 276,000 181,000
Net Income from Operations P 104,600 P 134,000
Interest Expense 80,000 20,000
Net Income P 24,600 P 114,000

(b) Effect on total assets, December 31, 2017 (see audit adjusting entries for 2017)
= 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated
(c) Effect on total assets, December 31, 2018 (see audit adjusting entries for 2018)
= 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated.

(d) Effect on total liabilities, December 31, 2018 (see audit adjusting entries for 2018)
= 6,400 + 90,000+22,000 = 118,400 understated

Problem 8
Particulars 2017 Profit Retained earnings, Non- current Retained earnings
Dec. 31, 2017 Assets, 12/31/18 January 1, 2017
Omission of unused supplies
12/31/16 15,000 15,000
12/31/17
Repairs charged to equipment on 1/1/16 8,500 (68,000) (59,500) (76,500)
AFS securities were measured at cost (20,000) (20,000) (2,400,000)
Correct cost of equipment, P746,070
Recorded cost 900,000
Difference 153,930
Difference in depreciation
2017 153,930 x 10% x 3/12 = 3,848 3,848 3,848 *(134,689)
2018 153,930 / 10 = 15,393
Interest expense
2017 P74,607 x 3/12 = (18,652) (18,652)
Net under (overstatement) (11,304) (87,804) (2,594,189) (76,500)

*CV of Client = 787,500 vs Correct CV = 652,811

Problem 9
a.) Computation of correct profit (loss)
 Chapter 2
Correction of Errors

Computation of retained earnings

2016 2017 2018

Balance, January 1 P 0 P(164,333) P117,667
Particulars 2017 2018 2019
Profit (loss) (164,333) 342,000 405,000
Omissions of
Dividends declared (60,000) (100,000)
Accrued expenses, 12/31/17 (20,000) 20,000
Balance, December 31 P(164,333) P117,667 422,667
12/31/18 (25,000) 25,000
12/31/19 (30,000)
Accrued income 12/31/17 32,000 (32,000)
12/31/18 30,000 (30,000)
12/31/19 26,000
Prepaid expenses 12/31/17 12,000 (12,000)
12/31/18 18,000 (18,000)
12/31/19 24,000
Unearned income 12/31/17 (15,000) 15,000
12/31/18 (10,000) 10,000
12/31/19 (8,000)
Omission in the ending inventory
2018 28,000 (28,000)
2019 64,000
Machine charged to expense on August 31, 2017 80,000
Depreciation on the machine (3,333) (10,000) (10,000)
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
(b) 2019 Audit Adjusting Entries

Retained Earnings 25,000

Operating Expenses 25,000

Operating Expenses 30,000

Accrued Expenses 30,000

Income 30,000
Retained Earnings 30,000

Accrued Income 26,000

Income 26,000

Expenses 18,000
Retained Earnings 18,000

Prepaid Expenses 24,000

Expenses 24,000

Retained Earnings 10,000

Income 10,000

Income 8,000
Unearned Income 8,000

Inventory, beginning/Cost of Sales 28,000

Retained Earnings 28,000
 Chapter 2
Correction of Errors
Inventory, end 64,000
Income Summary/ Cost of Sales 64,000

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

Problem 10
2017 AUDIT AJE 2018 AUDIT AJE
Allowance for Bad Debts 5,000
Bad Debts Expense 5,000
Unrealized Loss-P/L 3,000 Retained Earnings 3,000
Held for Trading Securities (FVPL) 3,000 Held for Trading Securities (FVPL) 3,000

Held for Trading Securities(FVPL) 10,000

Unrealized Gain P&L 10,000
COGS 8,900 Retained Earnings 8,900
Inventory, end 8,900 COGS 8,900

COGS 13,600
Inventory, end 13,600
Equipment 36,000
Equipment 36,000 Retained Earnings 36,000
Expense 36,000

Dep. Exp 3,000 Retained Earnings 3,000

Acc. Dep 3,000 Operating Expenses 3,000
Acc Dep 6,000

Acc. Dep 20,000

Equipment 17,000
Gain on Sale of Equipment 3,000

Prepaid Insurance 6,000 Prepaid Insurance 3,000

Insurance Expense 3,000 Insurance Expense 3,000
Retained Earnings 9,000 Retained Earnings 6,000

Sukiyaki Corporation
Statement of Comprehensive Income
For the Years Ended December 31, 2018 and 2017

2018 2017
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
 Chapter 2
Correction of Errors
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, 2018 and 2017
2018 2017

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, 2018

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, 2018 2,000
Cash Balance, December 31, 2018 P183,000
Chapter 2
Correction of Errors
Computations: 2018 2017
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

Problem 11 (Tahoma Corporation)

Adjusting Entries – December 31, 2018

Sales 100,000
Retained Earnings 100,000

Accounts Receivable 250,000

Sales 250,000

Retained Earnings 175,000

Purchases 175,000

Purchases 140,000
Accounts Payable 140,000

Sales 20,000
Adv. From customers 20,000

Retained Earnings 35,000

Expenses 35,000

Expenses 50,000
Accrued Expenses 50,000

Inventory, beginning 75,000

Retained Earnings 75,000

Inventory, end 110,000

COGS (Income Summary) 110,000
Chapter 2
Correction of Errors
Advances to Suppliers 50,000
Purchases 50,000
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 25,000
Allowance for Uncollectible Accounts 25,000

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 2018; both were charged to operating expenses, balance of
Mortgage payable before the annual payment in August 2018 is 450,000 + 50,000)

Interest Expense 18,000

Interest Payable 18,000
450,000 x 12% x 4/15

Statement of Comprehensive Income

Sales P 2,130,000
Cost of Sales
Inventory, January 1 75,000
Purchases 915,000
Inventory, Dec. 31 (110,000)
Cost of Sales 880,000
Gross Profit 1,250,000
Selling and Administrative Expenses 777,500
Profit before interest expense 472,500
Interest expense 58,000
Profit 414,500

Statement of Financial Position

Current Assets
Cash P 750,000
Accounts receivable, net of allowance for uncollectible accounts of P25,000 225,000
Advances to suppliers 50,000
Inventory 110,000
Total current assets P1,135,000
Non-current assets
Land P 400,000
Building, net of P50,000 accumulated depreciation 700,000
Printing equipment, net of P13,333 accumulated depreciation 86,667
Total property, plant and equipment P1,186,667
Chapter 2
Correction of Errors
Total assets P2,321,667
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable P 140,000
Accrued expenses 50,000
Current portion of mortgage payable 50,000
Interest payable 18,000
Unearned revenue 20,000
Total current liabilities P278,000

Non-current liabilities
Mortgage payable, net of current portion P 400,000
Total liabilities P 678,000

Shareholders’ Equity
Ordinary share capital P 1,000,000
Retained earnings *643,667
Total shareholders’ equity P 1,643,667
Total liabilities and shareholders’ equity P2,321,667

*Retained earnings, January 1, 2018 before adjustment P 300,000

Correction of prior period errors (70,833)
Profit for 2018 414,500
Retained earnings, December 31, 2018 P 643,667
Chapter 2
Misstatements in the Financial Statements

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

Multiple Choice

1. A 700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000

2. C -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 )
3. A - 29,000 – 15,000 + 22,000 = (22,000)
4. A 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000
5. B (300,000) + (50,000) + 100,000 = (250,000)
6. A - 16,000 – 15,000 – 10,000 + 10,800 = (30,200)
7. A - 15,000 + 10,800 = (4,200)
8. B 5,000,000 – 200,000 – 150,000 = 4,650,000
9. B 2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000
10. D 1,500,000 + 600,000 = 2,100,000
11. B 1,000,000 + 500,000 + 200,000 = 1,700,000
12. B 200,000 / 5
13.. C 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
14. B 3,000,000 – 400,000 = 2,600,000
15. A Profit is understated by 70,000 + 30,000; RE is understated by P30,000; P7,000 has been
counterbalanced.
16. D 50,400 / 9 = 5,600
17. C 54,000 – 11,200 = 42,800
18. C
19 A 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement
20. A -300,000 – 500,000 + 200,000 = 600,000 overstated