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AP.

M-1401
Correction of Error
Straight Problems
Problem 1
You were able to gather the following in connection with your audit of Russell Inc. for the year
ended December 31,2013:

Accounts Receivable
Notes Receivable- Trade
Allowance for Bad debts
Unpaid merchandise
invoice
Accrued Wages
Advertising Supplies
Inventory
Accrued Advertising
Expense
Prepaid Insurance
Unexpired Insurance
Merchandise Inventory
Equipment, net

December 31,2012
P 6,400,000
1,000,00
0.00
380,0
00.00
4,632,00
0.00
85,0
00.00
35,0
00.00

12/31/2013
P4,000,000
2,500,0
00.00
450,
000.00
2,621,0
00.00
125,
000.00
75,
000.00

14,2
50.00
25,0
00.00

40,
000.00

2,250,00
0.00
11,000,00
0.00

41,
000.00
3,120,0
00.00
15,000,0
00.00

During the year:


Amount collected from customer, P10,000,000 excluding a P100,000 collection from a
previously written-off account. Write-off of accounts receivables during the year
amounted to P150,000.
Sales returns (all prior to collections) amounted to P125,000 while sales discounts
granted to customers amounted to P300,000.
Total payments to suppliers of merchandise amounted to P8,250,000. Purchase returns
(all prior to payments amounted to P300,000).
Wages, Advertising and Insurance payments during the year were at P2,050,000,
P300,000 and P125,000 respectively.
The only transaction apart from the depreciation for the year , affecting equipments net
book value was the equipment acquisition at the beginning of the year costing
P4,500,000.

Required:
1. Gross sales for 2013 under accrual basis. P9,600,000
2. Gross purchases for 2013 under accrual basis. P6,539,000
3. Accrual wages for 2013. P2,090,000
4. Accrual Advertising Expense for 2013. P285,750
5. Accrual Basis net Income for 2013. P776,250
Problem 2
Azraels Garden, a calendar year sole-proprietorship, maintained its books on the cash basis
during the year.
Azrael is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2014 financial statements prepared on the accrual basis of
accounting from Azrael. As Azreals external auditor, you were called upon to assist in preparing
the financial statements. The following information were obtained during the course of your
engagement:
Azraels Garden
TRIAL BALANCE
December 31, 2014
Debits
Credits
CashP448,000
Accounts Receivable,12/31/13
283,500
Inventory,12/31/13
1,085,000
Furniture and Fixtures
2,068,500
Leasehold improvements
787,500
Accumulated Depreciation,12/31/13
P567,000
Accounts Payable
297,500
Azraels Drawings
Azraels capital
2,180,500
Sales
11,427,500
Purchases
5,339,250
Salaries Expense
3,045,000
Taxes and Licenses
217,000
Insurance expense
152,250
Rent Expense
598,500
Utilities expense
220,500
Living expenses
227,500
_________
P14,472,500
P14,472,500
a. At December 31,2014, amounts due from customers totaled P415,000.
b. Based on the analysis of the above receivables, P20,750 may prove uncollectible.

c. Unpaid invoices for plant purchases totaled P533,750 and P297,500 at December 31,
2014 and December 31, 2013 respectively.
d. The inventory totaled P1,274,000 based on physical count of the goods at December
31,2014. The inventory was priced at cost, which approximates market value.
e. On May 1,2014, Azrael paid P152,250 to renew its comprehensive insurance for one
year. The premium on the previous policy which expired on April 30,2014 was P136,500.
f. On January 2, 2014 Azrael entered into a twenty-year operating lease for the vacant lot
adjacent Azraels retail store used as a parking lot. As agreed in the lease, Azrael paved
and fenced in the lot at a cost of P787,500. The improvement were completed on April
1,2014 and estimated to have a useful life of fifteen years. No provision for deprecation
has been recorded. Depreciation on furniture and fixture was P210,000 for 2014.
g. Accrued expenses at December 31, 2014 and 2013 were as follows:
2014
2013
Taxes and licenses
P33,750
P20,250
Utilities
36,000
24,750
P69,750
P45,000
h. Azrael is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Azraels attorney belives that an unfavorable outcome is
probable and that a reasonable estimate of the settlement is P3,000,000.
i. The salaries account includes P40,000 per month paid to the proprietor. Azrael also
receives P4,375 per week for living expenses.
Required:
Detremine the amount to be reported for the following items in Azraels financial statements as
of and for the year ended December 31,2014 under accrual basis of accounting. (Disregard
income taxes)
1.
2.
3.
4.
5.

Net Income P1,629,625


Current Assets P2,167,000
Noncurrent assets P2,039,625
Azrael capital,12/31/13 P2,181,000
Azrael capital,12/31/14 P3,103,125

Problem 3
The following data are obtained from the single entry records kept by Joshu Merchandising for
2013:
December 31
January 1
Cash
Accounts receivable
Notes receivable
Equipment
Notes payable
Accounts Payable
Accounts Payable

1,600,000
2,000,000
1,200,000
960,000
1,120,000
480,000
1,040,000

1,200,000
1,600,000
400,000
1,600,000
1,200,000
720,000
1,200,000

Accrued Interest Payable


Unearned rent Income

40,000
40,000

80,000
120,000

The cashbook shows the following information:


Balance, January 1
Receipts:
Accounts Receivable (after discounts of P100,000)
Notes receivable
Cash Sales
Rent Income
Sale of equipment costing P200,000
and book value of P100,000
Additional cash investment by the owner

1,200,000
3,000,000
960,000
800,000
80,000
120,000
600,000

5,560,000

Payments
Accounts Payable
Notes payable
Cash purchases
Interest Expense
Expenses
Equipment
Withdrawals by owner
Balance, December 31
Audit Notes:
Accounts receivable of P120,000 was written off as uncollectible.
Returns of P320,000 were on merchandise sales.
Allowances for P80,000 were received in merchandise purchases.

Required:
Determine the audited balances of the following:
1. Net Sales
P6,080,000
2. Net Purchases
P3,000,000
3. Cost of Sales
P3,640,000
4. Rent Income
P160,000
5. Interest expense
P 120,000
6. Depreciation expense P380,000
7. Net Income P1,320,000

1,520,000
1,280,000
600,000
160,000
800,000
400,000
400,000 5,160,000
P1,600,000

Problem 4
When the records of Merlita Merchandising Company were reviewed at the close of 2013, the
errors listed below were discovered.
1. For each item, indicate the effects of each of the following errors by writing O for
overstatement, U for understatement and X for no effect in the appropriate column.
2012
N
I
Failure to record purchases
of merchandise
on account of
P25,000 at the end of 2012.
Sale of merchandise on account
on
December 30,2012 amounting to
P20,000
was not recorded until the
customer
paid his account on january 2013.
Depreciation expense on
equipment
in 2012 was overstated by
P10,000.
Paid one year insurance premium
of
P24,00 effective April 1,2012.
The entire amount was debited to
expense account and no
adjustment
was made at the end of 2012.
On December 31,2012, the
Company acquired a parcel of
land
and a building at a total cost of
P500,000. The entire amount paid
was debited to land account. A
reasonable estimate of the cost
that should have been alocated to
the building was P200,000. The
building has an estimated life
of 20 years.
Failure to record supplies on hand
at the end of 2012. The supplies
on hand amounted to P5,000.
Understatement of 2012 ending
inventory worth P24,000.
Failure to record accrued interest
on notes payable at the end of
2012.Notes payable,principal
amount P100,000;interest rate,
10%;acquired March 31,2012.
Failure to recognize unearned rent
at the end of 2012 worth
P12,000.

Ass
et

Liabilit
y

RE,befor
e
closing

2013
Re,
after
closing

N
I

Ass
et

Liabilit
y

RE,befor
e
closing

Re,
after
closin
g

Goods received in December


2012
were recorded as purchases when
paid in 2013. The goods were
excluded
from the 2012 ending inventory.

Answer:
2012

2013
Ass
et

Liabilit
y

Ass
et

Liabilit
y

On December 31,2012, the


Company acquired a parcel of
land
and a building at a total cost of
P500,000. The entire amount paid
was debited to land account. A
reasonable estimate of the cost
that should have been alocated to
the building was P200,000. The
building has an estimated life
of 20 years.

Failure to record supplies on hand


at the end of 2012. The supplies
on hand amounted to P5,000.

Understatement of 2012 ending


inventory worth P24,000.

Failure to record accrued interest


on notes payable at the end of
2012.Notes payable,principal
amount P100,000;interest rate,
10%;acquired March 31,2012.
Failure to recognize unearned rent
at the end of 2012 worth
P12,000.

N
I

Re,
after
closin
g

N
I
Failure to record purchases
of merchandise
on account of
P25,000 at the end of 2012.
Sale of merchandise on account
on
December 30,2012 amounting to
P20,000
was not recorded until the
customer
paid his account on january 2013.
Depreciation expense on
equipment
in 2012 was overstated by
P10,000.
Paid one year insurance premium
of
P24,00 effective April 1,2012.
The entire amount was debited to
expense account and no
adjustment
was made at the end of 2012.

Re,
after
closing

RE,befor
e
closing

RE,befor
e
closing

Goods received in December


2012
were recorded as purchases when
paid in 2013. The goods were
excluded
from the 2012 ending inventory.

Problem 5
The income statement of Menandro Inc. showed the following net income:
2013
P1,750,000
2014
2,000,000
An examination of the accounting records for the year ended December 31,2014 revealed that
several errors were made. The following errors were discovered:
a. Salary accrued at year end and were consistently omitted:
2013
P100,000
2014
140,000
b. The footings and extensions showed that the inventory on December 31,2013 was overstated
by P190,000.
c. Prepaid insurance of P120,000 applicable to 2015 was expensed in 2014.
d. Interest receivable of p20,000 was not recorded on December 31,2014.
e. On December 26,2014 an equipment costing P400,000 was sold for P220,000. At the date of
sale, the equipment had an accumulated depreciation of P240,000. The cash received was
recorded as miscellaneous income in 2014.
f. A building which had a fair value of P1,200,000 was accepted form the city government as a
donation on January 1.2013. The building that was estimated to be useful for another 10
years was to be used as factory site as a condition on the grant. Legal fees incurred in
relation to the donation was at P100,000 and was charged to 2013 operating expenses.
Another P200,000 was incurred to remodel and renovate the building prior to use. The
building was capitalized at P200,000 (renovation cost) and was depreciated over remaining
life using straight line.
Required:
1. Correct net income in 2013. P1,550,000
2. Correct net income in 2014. 2,120,000
3. What is the retroactive adjustment to the 2015 beginning retained earnings ? 80,000
Increase
4. What is the net effect of errors to the 2014 working capital? 0
5. What is the correct carrying value of the building as of December 31,2014? 1,200,000
Problem 6
The income statement of Japhet Company for the years ended December 2013,2014,2015
indicate the following net income:
2013
170,000
2014
205,000

2015
186,000
An examination of the accounting records for three years indicates that several errors were made
in arriving at the net income amounts reported. The following errors were discovered.
a. Sale of merchandise on account amounting to 15,000 was not recorded at the end of
2014.
b. Goods costing P8,000 were in transit from a supplier on December 31,2013. The ggods
were appropriately included in the ending inventory but the corresponding purchase was
not recorded.
c. Accrued salaries were consistently omitted from the records. The amounts omitted were:
2013
P10,000
2014
14,000
2015
16,000
d. The merchandise inventory at December 31,2014 was understated by P9,000 as the result
of errors made in the footings and extensions on inventory sheets.
e. Unexpired insurance of P12,000 applicable tp 2014 was expensed in 2013.
f. Interest receivable of P2,400 was not recorded on December 31,2014.
g. On January 2,2014, a piece of equipment costing p40,000 was solf for p18,000. At the
date of sale, the equipment had an accumulated depreciation of P24,000. The cash
received was recorded as income in 2014. In addition, depreciation was recorded for this
equipment in both 2014 and 2015 at the rate of 10% of cost.
Required:
Compute the adjusted net income from 2013 t0 2015.
2013
164,000
2014
211,400
2015
161,600
Problem 7
You are auditing the financial statement of Ariel Company for the first time. You have discovered
that the merchandise inventory at the end of each year was understated by P100,000 and
P200,000 in 2013 and 2014 respectively.
In addition in inspecting the record of the company, you discovered that some items had been
improperly recorded and that certain yearend adjustments had been overlooked in 2013 and
2014. These omissions and other errors for each summarized as follows:
Accrued Salaries
Accrud interest income
Prepaid Insurance
Advances form customers
(collections from customers had
been recorded as sales but should
have been recognized as
advances form customers
because goods were not shipped
until the followin year.)
Machinery (Capital expenditures
had been recorded as repairs but

12/31/2013
780,000
213,000
307,800
561,000

13/31/2014
873,600
259,200
384,000
470,400

522,000

564,000

should have been charged to


machinery;the depreciation rate
is 10% per year, but depreciaton
in the year of expenditure is to be
recognized at 5%)

Required:
Based on the above data and the result of your audit, provide the following:
1. Total effects of errors on 2013 net income. 65,000 overstated
2. Total effects of errors on the 2014 net income. (420,000) understated
3. Total effect of errors on the balance of the companys retained earnings at December
31,2014?
(355,100) Understated
4. What is the effect of the 2013 errors in the 2014 net income? (544,000) understated
5. What is total effect of errors on the companys working capital at December 31,2014?
620,200 overstated
6. The necessary adjusting entry for the error in recording capital expenditures on
Machinery as of December 31,2013.
Machinery
564,000
Deprecation expense
56,400
Accumulated deprecation
84,600
Retained earnings
535,800
Multiple Choice Questions
Questions 1through 5 are based on the following information:
Your audit Kuia Company disclosed that your client kept very limited records. Purchases
of merchandise were paid for by check, but most other items were out of cash receipts.
The companys collections were deposited weekly. No record was kept of cash in the
bank, nor was a record kept of sales. Accounts receivable were recorded only by keeping
a copy of ticket, and this copy was given to the customer when he paid his account.
Additional information:
a. On January 2, 2014 Kuia Company statrted business and issued share capital, 72,000
shares with P100 par for the following considerations:
Cash
P600,0000
Building(useful life, 15 years)
5,400,000
Land
1,800,000
P7,800,000
b. An analysis of the bank statements showed total deposits including the original cash
investment of P4,200,000. The balance in the bank statement on Decmeber 31, 2014
was P300,000 but there were checks amounting to P60,000 dated in December but
not paid by the bank until January 2015. Cash on hand on December 31,2014 was
P150,000 including customers deposit of P90,000.

c. During the year, Kuia borrowed P600,000 from the bank and repaid P150,000 and
P30,000 interest.
d. Disbursements paid in cash during the year were as follows:
Utilities
P120,000
Salaries
120,000
Supplies
240,000
Dividends
180,000
P660,000
e. An inventory of merchandise taken on December 31,2014 showed P906,000 of
merchandise.
f. Ticjets for accounts receivable totalled P1,080,000 but P60,000 of that amount may
prove uncollectible.
g. Unpaid suppliers invoices for merchandise amounted to P420,000.
h. Equipment with a cash price of P480,000 was purchased in early January on a one
year installment basis. During the year, checks for the downpayment and all maturing
installments totalled P534,000. The equipment has a useful life of 5 years.
Required:
Based on the above and the result of your audit, determine the following: (disregard income
taxes)
1. Payment for merchandise purchases in 2014
a. P2,646,000
c. P2,436,000
b. P2,586,000
d. P3,246,000
2. Collections from sales in 2014
a. P3,720,000
c. P4,320,000
b. P3,000,000
d. P4,920,000
3. Net income for the year ended December 31,2014
a. P1,560,000
c. P1,770,000
b. P1,620,000
d. P960,000
4. Shareholders equity as of December 31, 2013
a. P9,180,000
c. P9,390,000
b. P9,240,000
d. P8,580,000
5. Total assests as of December 31, 2014
a. P9,540,000
c. P9,450,000
b. P9,583,200
d. P9,390,000
Questions 6 through 8 are based on the following information:
You were first appointed auditor of Jeffrey Corporation in 2014. YOU completed the audit for
2014 and prepared audited financial statements directly from the audit working papers.
You have returned to make the 2015 audit and discovered that the clients bookkeeper failed to
record adjusting entries you made in 2014 audit working papers, which you entailed adjustments
for the following items:
a. The December 31, 2014 inventory was understated by P5,000.
b. No entry was made for accrued utilities expense of P2,500 as of yearend.
c. Ordinary motor repairs of P3,200 were charged to accumulated depreciation during 2014.

d. The company failed to record the provision for uncollectible accounts in the amount of
P6,000.
Your examination for the 2015 entries in the accounts uncovered the ff:
An expenditure of P10,000 for repairs of office equipment had been charged to Furniture
and Equipment. The company records depreciation at 10% of the December 31 balance
of the Property and Equipment Accounts.
A 2014 accounts receivable in the amount of P4,000 had been written off uncollectible by
a charged to retained earnings.
Salemens commission includes P2,400 paid on undelivered customers orders.
Additional data:
The audited statement of 2014 showed a net income of P250,000
The unadjusted net income for 2015 is P320,000.
Required:
6. The unadjusted net income for the year 2014 is:
a. P253,500
c. P256,700
b. P263,700
d. P261,700
7. The adjusted net income for the year 2015 is:
a. P315,900
c. P308,400
b. P310,900
d. P314,900
8. By how much would the December 31,2015 retained earnings be misstated if no
adjustments were made for the above errors?
a. Retained earnings overstated by P11,800.
b. Retained earnings overstated by P15,800.
c. Retained earnings overstated by P12,800.
d. Retained earnings overstated by P16,800.
Questions 9 through 10 are based on the following information:
Janice Company, whose fiscal year ends on November 30, is in the process of negotiating a loan
for expansion purposes and the bank has required audited financial statements. During the course
of your audit, the following additional information were obtained:
a. An account payable of P8,000 for merchandise purchased on November 23,2014 was
recorded in December 2014. This merchandise was included in inventory at November
30,2014.
b. Based on an aging of the accounts receivable as of November 30,2014, it was estimated
that P40,000 of the receivables will become uncollectible. The allowance for bad debts
has a credit balance of P5,000.
c. A check for P1,800 from a customer to apply his account was received on November 30,
2014 but was not recorded until December 2, 2014.
d. A P5,000 insurance premium paid on November 30,2014 on a policy expiring one year
later was charged to office supplies.
e. On June 1,2014, a production machine purchased for P24,000 was charged to
Accumulated Depreciation. Janice Corporation depreciates machine of this type on a
straight line method over a 5-year life with no salvage value.
f. Research and development costs of P150,000 were incurred in the development of a
patent which Janice expects to be granted during the fiscal year ending November

30,2014. Vince initiated a 5 year amortization of the P150,000 total cost during the fiscal
year ended Novemeber 20,2014.
g. During December 2014, a competitor filed suit against Janice corporation for patent
infringement claiming P300,000 in damages. At December 31,2014, Janices legal
counsel felt that the likelihood of losing the lawsuit was possible but not probable. No
provision has been booked for this lawsuit.
h. The November 30,2013 inventory was understated by P16,000.
i. Income statement prepared by the client reflected an income of P450,000.
Based on the foregoing data, answer the ff requirements:
9. The adjusted net income for the fiscal year ended November 30,2014 should be:
a. P300,600
c. P265,600
b. P266,200
d. P268,600
10. What is the net effect of the above errors on the total assets at November 30,2014?
a. Total assets overstated by P157,400.
b. Total assets overstated by P133,400.
c. Total assets overstated by P141,400.
d. Total assets overstated by P117,400.