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P1/AP - CORRECTION OF ERRORS

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. John Paul s December 31 year end financial statements had the following errors:
December 31,2015 December31,2016
Ending inventory P13,500 understated P19,800 Overstated
Depreciation expense 3,600 understated -
Unearned rental 5,000 understated -
Prepaid insurance - 8,000 understated
There were no other errors during the years 2015 or 2016 and no connections have been made for any of
the errors. (ignore income tax considerations).
1. what is the net effect of the errors on John Pauls 2016 net income?
a. understated by P13,000
b. overstated by P14,800
c. overstated by P20,300
d. overstated by P25,300
2. What is the net effect of the errors in John Pauls December 31,2016 accumulated profits
balance?
a. overstated by P11,800
b. overstated by P15,400
c. understated by P20,300
d. overstated by 25,300

3.What is the net effect of the errors in ohn Pauls December 31,2016 working capital?
a. understated by P4,900
b. understated by P8,000
c. overstated by P11,800
d. understated by P20,300
2. Arlene Company discovered the following errors in its financial records at the
beginning of the year 2016:

A. The physical inventory count on December 31, 2015 excluded a merchandise


with a cost of 38,000 that had been temporarily stored in a public warehouse.
Everlasting uses the periodic inventory system.
B. During 2015, a competitor filed a patent infringement suit against Arlene
claming damages of 440,000. The companys legal counsel has indicated that an
unfavorable verdict is probable and a reasonable estimate of the courts award to
the competitor is 250,000. The company has not reflected or disclosed this
situation in the financial statements.
C. A trademark was acquired at the beginning of 2014 for 100,000. No
amortization has been recorded since acquisition. It is the companys policy to
amortize all intangibles with a definite life for a maximum of 20 years. At the
time of acquisition, the trademark was estimated to have a definite life of 20
years.

What is the effect of the above errors on the January 1, 2016 accumulated profits?

a. 214,500 overstated
b. 217,000 overstated
c. 222,000 overstated
d. 293,000 overstated
3. The December 31 year end financial statement of Ana co. contained the following errors:
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December 31,2015 December 31,2016


Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -

An insurance premium of P330,000 was prepaid in 2015 covering the years 2015, 2016, and 2017. The
entire amount was charged to expense in 2015. In addition, on December 31, 2016, a fully depreciated
machinery was sold for P75,000 cash, but the sale was not recorded until 2016. There were no other
errors during 2015 and 2016, and no corrections have been made for any of the errors. Ignore income tax
effects.

1. What is the total effects of the errors on Anas 2016 net income?
a. P123,500 overstatement
b. P27,500 overstatement
c. P192,500 understatement
d. P177,500 understatement

2. What is the total effect of the errors on the amount of Anas working capital at December
31,2016?
a. P75,500 overstatement
b. P40,500 overstatement
c. P225,500 understatement
d. P144,500 understatement

3. What is the total effect of the errors on the balance of Anas retained earnings at December
31,2016?
a. P156,000 understatement
b. P87,000 overstatement
c. P133,000 understatement
d. P85,000 understatement
4. Steven 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 2015 and P185,000 for 2016. Further review of the records reveals that the following items
were handled improperly.
Rent of P6,500 was received from a lessee on December 31, 2015. It was recorded as income at
that time even though the rental pertains to 2016.
Salaries payables on December 31 have been consistently omitted from the records of the date
and have been recorded as expenses when paid in the following year. The salary accruals recorded
in this manner were:
December 31, 2014 P5,500
December 31, 2015 7,500
December 31, 2016 4,700
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 to them.
December 31, 2014 P6,500
December 31, 2015 3,700
December 31, 2016 7,100
What is the corrected net income for 2015?
a. P133,700
b. P144,200
c. P146,700
d. P139,300

What is the corrected net income for 2016?


a. P184,700
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b. P197,700
c. P185,600
d. P190,900
5. Allisson corp. reported the following amounts of net income for the years ended December 31, 2014,
2015, and 2016:

2014 P127,000
2015 150,000
2016 128,500

You are performing the audit for the year ended December 31, 2016. During your examination, you
discover the following errors:

As a result of errors in the physical count, ending inventories were misstated as follows:
December31, 2015 P14,000 understated
December 31, 2016 23,000 overstated

On December 29, 2016 Allisson recorded as a purchase, merchandise in transit which cost
P15,000. The merchandise was shipped FOB Destination and had not arrived by
December 31. The merchandise was not included in the ending inventory.
Allisson records sales on the accrual basis but failed to record sales account made near the
end of ach year as follows:
2014 P4,000
2015 5,000
2016 3,500

The company failed to record accrued office salaries as follows:


December 31,2014 P10,000
December 31,2015 14,000

On March 1,2015, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P10,000 and market value was P13,000. The stock dividend was
recorded as follows:
Miscellaneous expense 13,000
Common stock 10,000
Retained earnings 3,000

On July 1 2015, Allisson acquired a three-year insurance policy. The three-year premium
of P6,000 was paid on that date, and the entire premium was recorded as insurance
expense.
On Jan.1, 2016, Allisson retired bonds with a book value of P120,000 for P106,000. The
gain was incorrectly deferred and is being amortized over 10 years as a reduction to
interest expense on other outstanding obligations.

What is the adjusted net income for the year ended December 31, 2014?
a. 133,000
b. 117,000
c. 121,000
d. 113,000

What is the adjusted net income for the year ended December 31, 2015?
a. 159,000
b. 187,000
c. 178,000
d. 179,000
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What is the adjusted net income for the year ended December 31, 2016?
a. 129,600
b. 131,000
c. 104,400
d. 139,600

What adjusting entry should be made on December 31, 2016 to correct the error describe in 2nd
transaction?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases 15,000
Accounts Payable 15,000
c. Accounts Payable 15,000
Cash 15,000
d. No adjusting journal entry is necessary

The adjusting entry on December 31, 2015 to correct the error described in the 5th transactions should
include a debit to
a. Common stock for P10,000
b. Retained Earnings for P16,000
c. Additional paid in capital for P3,000
d. Miscellaneous expenses for P3,000
6. Allisson corp. reported pretax incomes of P505,000 and P387,000 for the years ended December 31,2015
and 2016, respectively. However, the auditor noted that the following errors had been made:

Sales for 2015 included amounts of P191,000 which had been received in cash during
2015, but for which the related goods were shipped in 2016. Title did not pass to the buyer
until 2016.
The inventory on December 31,2015 was understated by P43,200
The companys accountant, in recording interest expense 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, 2015 to yield an effective interest rate of 7%.
Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2015 and 2016. Repairs of P42,500 and P47,000 had been incurred in 2015 and
2016, respectively. In determining depreciation charges, Allisson applies a rate of 10% to
the balance in the Equipment account at the end of the year.

What is the corrected pretax income for 2015?


a. 303,200
b. 225,300
c. 311,700
d. 307,450

What is the corrected pretax income for 2016?


a. 488,992
b. 480,042
c. 484,292
d. 575,392

7. Ventura Corporation purchased machinery on January 1, 2014 for 630,000. The company used the
sum-of-the-years-digits method and no salvage value to depreciate the asset for the first two years of its
estimated six-year life. In 2015, Ventura changed to the straight-line depreciation method for this asset.
The following facts pertain:
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2014 2015
Straight-line 105,000 105,000
Sum-of-the-years-digits 180,000 150,000

1. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning
retained earnings is
a. 135,000.
b. 120,000.
c. 72,000.
d. 0.

2. The amount that Ventura should report for depreciation expense on its 2016 income statement is
a. 120,000.
b. 105,000.
c. 75,000.
d. none of the above.
8. On December 31, 2016 Dean Company changed its method of accounting for inventory from the average cost
method to the FIFO method. This change caused the 2016 beginning inventory to increase by 420,000. The
cumulative effect of this accounting change to be reported for the year ended 12/31/2016, assuming a 40% tax rate,
is
a. 420,000.
b. 252,000.
c. 168,000.
d. 0.

9. Swift Company purchased a machine on January 1, 2013, for 300,000. At the date of acquisition, the machine had
an estimated useful life of six years with no residual value. The machine is being depreciated on a straight-line
basis. On January 1, 2016, Swift determined, as a result of additional information, that the machine had an
estimated useful life of eight years from the date of acquisition with no residual value. An accounting change was
made in 2016 to reflect this additional information.

1. Assume that the direct effects of this change are limited to the effect on depreciation and the related tax
provision, and that the income tax rate was 30% in 2013, 2014, 2015, and 2016. What should be reported
in Swift's income statement for the year ended December 31, 2016, as the cumulative effect on prior years
of changing the estimated useful life of the machine?
a. 0
b. 20,000
c. 30,000
d. 105,000

2. What is the amount of depreciation expense on this machine that should be charged in Swift's income
statement for the year ended December 31, 2016?
a. 30,000
b. 37,500
c. 60,000
d. 75,000

10. In January 2015, Marcus Ltd. has installation costs of 9,000 on new machinery that were charged to Repair
Expense. Other costs of this machinery of 30,000 were correctly recorded and have been depreciated using the
straight-line method with an estimated life of 10 years and no residual value. At December 31,2016, Marcus
decides that the machinery has a remaining useful life of 15 years, starting with January 1,2016

1. If the book have not been closed for 2016 and depreciation expense has not yet been recorded
for 2016, the entry that marcus makes in 2016 to correct for the error of expensing installation
costs on the machinery acquired in January, 2015, will include:
a. a debit to Retained Earnings for 9,000
b. a credit to Retained Earnings for 9,000.
c. a debit to Retained Earnings for 8,100.
d. a credit to Retained Earnings for 8,100.
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2. If the book have not been closed for 2016 and depreciation expense has not yet been recorded
for 2016, the entry that marcus makes in 2016 to record depreciation on the machinery acquired
in January, 2015, will include:
a. a debit to Depreciation Expense for 2,600
b. a credit to Accumulated Depreciation for 900.
c. a debit to Depreciation Expense for 3,900
d. a credit to Depreciation Expense for 2,340
11. The following information pertains to Ana co.s depreciable assets:

Machine X was purchased for P150,000 on January 1, 2009. The entire cost was expensed in the
year of acquisition. The estimated useful life of this machine is 15 years with no residual value.
Machine Y cost P525,000 and was acquired on January 1, 2010. 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, 2014, it was estimated that the remaining life of the asset would be 4
years and that there would be a P25,000 residual value.
A building was purchased on January 3, 2011, 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, 2014 , a change was made to the sum of the years digit of depreciation. No change
was made to the estimated useful life and residual value of the building.

1. The adjusting entry on January 1,2014 relative to machine X should include a credit to
a. accumulated depreciation of P60,000
b. retained earnings for P100,000
c. machinery for P150,000
d. no adjusting entry is necessary

2. What is the carrying value of machine Y on January 1,2014?


a. P350,000
b. P325,000
c. P306,250
d. P525,000

3. What is the depreciation expense on machine Y for 2014?


a. P87,500
b. P77,083
c. P81,250
d. P41,667

4. What is the book value of the building at December 31, 2013?


a. P2,185,714
b. P2,550,000
c. P1,942,857
d. P2,266,667

5. What is the book value of the building at December 31, 2014?


a. P2,185,714
b. P2,550,000
c. P1,942,857
d. P2,266,667
12. Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales.
Due to a technological advance in production at the beginning of year 3, Oak now believes 1% of sales to be a
better estimate of warranty costs. Warranty costs of 80,000 and 96,000 were reported in year 1 and year 2,
respectively. Sales for year 3 were 5,000,000. What amount should be presented in Oaks year 3 financial
statements as warranty expense?
a. 50,000
b. 88,000
c. 100,000
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d. 138,000
13. Robi Corporation reported profit for the years 2015 and 2016 at P550, 000 and P700.000, respectively.
Your audit of the companys accounts disclosed the need for adjustments as follows:

2015 2016
Overstatement of ending inventories due P P
to error in pricing 29,000 33,000
Omission of depreciation on newly-
acquired equipment 15,000 15,000
Understatement of commission
receivable 22,000 18,000
A purchase of merchandise was not
recorded until the following year, and
also was not included in the ending
inventory 60,000

1. The adjusted profit for 2016 was


a. P677,000
b. P700,000
c. P710,000
d. P737,000

2. What is the effect of the foregoing errors on total assets at December 31, 2016?
a. P30,000 overstated
b. P36,000 overstated
c. P45,000 overstated
d. P66,000 overstated

3. What is the effect of the foregoing errors on retained earnings at December 31, 2015?
a. P22,000 overstated
b. P38,000 understated
c. P67,000 overstated
d. P82,000 overstated
14. The Joseph, Inc. has determined its 2016 profit to be P5,000,000. In an initial audit of the companys
financial statements, you determined the following:

Revenue received in advance in 2016 of P250,000 was credited to a revenue account when
received. Of the total, P50,000 was earned in 2016, P120,000 will be earned in 2017, and the
remainder will be earned in 2016. No adjustment was made at the end of 2016.

P150,000 unrealized loss on FVPL (financial asset at fair value through profit or loss) in 2016
was debited to other comprehensive income account.
What is the corrected profit for the year 2016?
a. P4,600,000
b. P4,650,000
c. P4,850,000
d. P4,930,000