AUDIT OF ERROR CORRECTION AND CASH AND ACCRUALS /

SHAREHOLDER’S EQUITY

PROBLEM 1
You were able to gather the following in connection with your audit of Russell Inc. for the year
ended December 31,2019:

December 31,2018 December 31, 2019

Accounts Receivable P 6,400,000 P4,000,000
Notes Receivable- Trade 1,000,000.00 2,500,000.00
Allowance for Bad debts 380,000.00 450,000.00
Unpaid merchandise invoice 4,632,000.00 2,621,000.00
Accrued Wages 85,000.00 125,000.00
Advertising Supplies 35,000.00 75,000.00
Accrued Advertising Expense 14,250.00 40,000.00

Prepaid Insurance 25,000.00 -

Unexpired Insurance - 41,000.00
Merchandise Inventory 2,250,000.00 3,120,000.00
Equipment, net 11,000,000.00 15,000,000.00

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 equipment’s net
book value was the equipment acquisition at the beginning of the year costing
P4,500,000.

Required:
1. Gross sales for 2019 under accrual basis.
2. Gross purchases for 2019 under accrual basis.
3. Accrual wages for 2019.
4. Accrual Advertising Expense for 2019.
5. Accrual Basis net Income for 2019.

PROBLEM 2
The income statement of Japhet Company for the years ended December 2019,2020,2021
indicate the following net income:
2019 170,000
 2020 205,000
2021 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
2020.
b. Goods costing P8,000 were in transit from a supplier on December 31,2019. The goods
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:
2019 P10,000
2020 14,000
2021 16,000
d. The merchandise inventory at December 31,2020 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 to 2020 was expensed in 2019.
f. Interest receivable of P2,400 was not recorded on December 31,2020.
g. On January 2,2020, a piece of equipment costing p40,000 was sold 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 2020. In addition, depreciation was recorded for this
equipment in both 2020 and 2021 at the rate of 10% of cost.

Required:
Compute the adjusted net income from 2019 to 2021.
2019
2020
2021

PROBLEM NO. 3
Following is the stockholders’ equity section of Tenacity Corporation’s balance sheet at
December 31, 2019:
Common stock, P10 par value; authorized 1,500,000
shares; issued and outstanding 900,000 shares P9,000,000
Additional paid-in capital 750,000
Retained earnings 2,700,000
Total stockholders’ equity P12,450,000

Transactions during 2020 and other information relating to the stockholders’ equity accounts
were as follows:
 On January 26, Tenacity reacquired 75,000 shares of its common stock for P11 per
share.
 On April 4, Tenacity sold 45,000 shares of its treasury stock for P14 per share.
 On June 1, Tenacity declared a cash dividend of P1 per share, payable on July 15, 2020
to stockholders of record on July 1, 2020.
 On August 15, each stockholder was issued one stock right for each share held to
purchase two additional shares of stock for P12 per share. The rights expire on October
31, 2020.
  On September 30, 150,000 stock rights were exercised when the market value of the
stock was P12.50 per share.
 On November 2, Tenacity declared a two for one stock split-up and charged the par
value of the stock from P10 to P5 per share. On November 20, shares were issued for
the stock split.
 On December 5, 60,000 shares were issued in exchange for a secondhand equipment.
It originally cost P600,000, was carried by the previous owner at a book value of
P300,000, and was recently appraised at P390,000.
 Net income for 2020 was P720,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31,
2020:
1. Common stock
2. Additional paid-in capital
3. Unapproriated retained earnings
4. Total stockholders’ equity

PROBLEM NO. 4
The following data were compiled prior to preparing the balance sheet of the Conviction
Corporation as of December 31, 2020:
Authorized common stock, P100 par value P4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000
Stock warrants outstanding 200,000
Treasury stock, at cost 144,000
Unissued common stock 800,000
REQUIRED:
Compute for the following:

1. Common stock issued

2. Additional paid-in capital (APIC)
3. Appropriated retained earnings
4. Total stockholders’ equity
5. Legal capital