Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

Auditing and Assurance Services, Part 2 (ACCTG29&30) AP2 - 06

CORRECTION OF ERRORS

Problem I
Ron-Ron Storage underwent a restructuring in 2018. The company conducted a thorough internal audit, during which the
following facts were discovered. The audit occurred during 2018 before any adjusting entries or closing entries are
prepared.
a. Additional printers were acquired at the beginning of 2016 and added to the company’s office network. The P9,000
cost of the printers was inadvertently recorded as maintenance expense. The printers have five-year useful lives and
no material salvage value. This class of equipment is depreciated by the straight-line method.
b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the expenditure as office
supplies on hand. The error was discovered a week later.
c. On December 31, 2017, inventory was understated by P112,000 due to a mistake in the physical inventory count. The
company uses the periodic inventory system.
d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares, P1) as follows:
Retained earnings 4,000
Common stock 4,000
The shares had a market price at the time of P10 per share.
e. At the end of 2017, the company failed to accrue interest expense that accrued during the last four months of 2017 on
bonds payable. The bonds which were issued at face value mature in 2022. The following entry was recorded on
March 1, 2018, when the semi-annual interest was paid:
Interest expense 180,000
Cash 180,000
f. A three-year liability insurance policy was purchased at the beginning of 2017 for P216,000. The full premium was
debited to insurance expense at the time.
Questions
1. Net income of 2016 is:
a. Overstated by P9,000 c. Overstated by P7,200
b. Understated by P9,000 d. Understated by P7,200
2. Net income of 2017 is
a. Understated by P374,200 c. Understated by P89,800
b. Understated by P134,200 d. Overstated by P81,800
3. Net income of 2018 is
a. Overstated by P65,800 c. Overstated by P305,800
b. Overstated by P185,800 d. Understated by P38,200
4. Accrued interest on Bonds Payable is
a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000

Problem II
You been asked by a client to review the records of the Claire Joy Company, a small manufacturer of precision tools and
machines. Your client is interested in buying the business, and arrangements have been made for you to review the
accounting records.
Your examination reveals the following:
a. Claire Joy Company commenced business on April 1, 2015, reporting on a fiscal year ending March 31. The company
has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before
closing and before deducting income taxes:
Year Ended March 31 Income Before Taxes
2016……………………………………… P 71,600
2017……………………………………… 111,400
2018……………………………………… 103,580
b. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as
an ordinary sale and billed as such. On March 31 of each year, machines billed and in the hands of consignees
amounted for:
2016…………………………………….. P7, 800
2017…………………………………….. none
2018…………………………………….. 5, 590
 Sales price was determined by adding 30% to cost. You learned that the consigned goods were sold the following
year.
c. On March 30, 2017, two machines were shipped to a customer on a C.O.D. basis. The sale was not entered until April
5, 2017 when cash was received for P6,100. The machines were not included in the inventory at March 31, 2017.
(Title passed on March 30, 2017).
d. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be in connection
with the warranty will amount to ½ of 1% of sales. The company has charged an expense account for warranty costs
incurred.
Sales per books and warranty costs were:
Warranty of Expense for Sales Made in
Year Ended March 31 Sales 2016 2017 2018 Total
2016 P940,000 P760 P760
2017 1,010,000 360 P1,310 1,670
2018 1,795,000 320 1,620 P1,910 3,850
e. The bank deducts 6% on all contracts financed. Of this amount ½% is place in a reserve to the credit of Claire Joy
Company, which is refunded to Claire Joy as finance contracts are paid in full. The reserve established by the bank
has not been reflected in the books of Claire Joy. The excess of credits over debits (net increase) to the reserve
account with Claire Joy, on the books of the bank for each fiscal year were as follows:
2016…………………………………. P 4,000
2017…………………………………. 4,000
2018…………………………………. 5,000
P 14,000
f. A delivery equipment with a 10-year life (no residual value, straight-line depreciation) was purchased on April 1, 2017
by issuing a P 600,000 non- interest- bearing, 4-year note. The entry made to record the purchase was a debit to
Delivery Equipment and a credit to Notes payable for P 600,000; a 10% is a fair rate of interest on the note. The
accountant failed to provide for depreciation for the year on this equipment.
g. For the last three (3) years, the company has failed to accrue salaries and wages. The correct amounts at the end of
each fiscal year were:
2016…………………………………. P 12, 000
2017…………………………………. 18, 000
2018…………………………………. 10, 000
Questions
Answer the following questions based on the audit findings. Ignore income tax implications.
1. The adjusting entry to set up the estimated Liability under Warranties is
a. Warranty expense 5,411
Retained earnings 7,006
Estimated liability under warranties 12,417
b. Retained earnings 5,411
Warranty expense 7,006
Estimated liability under warranties 12,417
c. Warranty expense 12,417
Estimated liability under warranties 12,417
d. Retained earnings 12,417
Estimated liability under warranties 12,417
2. The total receivable from the bank representing dealers fund reserve as of March 31, 2018 is:
a. P 5,100 b. P 6,900 c. P 12,000 d. P 14,000
3. Sales in 2016 were (over) understated by
a. P 6,500 b. P (6,500) c. P 7,800 d. P (7,800)
4. Sales in 2018 were (over) understated by:
a. P 6,500 b. P (6,100) c. P (5,590) d. P (11,690)
5. The accrued Salaries Payable that should be set up on March 31, 2018 is:
a. P 18,000 b. P 28,000 c. P 10,000 d. P 40,000
6. The audited balance of Discount on Note Payable as of March 31, 2018 is:
a. P 0 b. P 102, 452 c. P 149, 211 d. P 190, 192
7. Depreciation Expense for fiscal year 2006 that should be provided on the equipment purchased on April 1, 2017 is
a. P 13,660 b. P 40,981 c. P 60,000 d. P 66,000
Problem III
You are auditing the accounts of Keith Zandro Merchandising Corporation for the year ended December 31, 2018. You
discover that the adjustments made in the previous audit for the year 2017 were not entered in the accounts by Keith
Zandro’s bookkeeper; therefore, the accounts are not in agreement with the audited amounts as of December 31, 2017. The
following adjustments were included in the 2017 audit report:
a. Invoices for merchandise purchased on credit in December 2017 were not entered on the books until payment of
P12,000 was made in January 2018. The merchandise was not included in the December 31, 2017 inventory. The
company uses a periodic inventory system.
b. Invoices for merchandise received on credit in December 2017 were not recorded in the accounts until payment was
made in January 2018; the goods were included in the 2017 ending inventory, P18,000.
c. Allowance for doubtful accounts for 2017 was understated by P2,000 because bad debts expense in 2017 was not
recorded.
d. Selling expense for 2017, P5,000, was not recorded in the accounts until paid in 2018.
e. Accrued wages of P4,000 at December 31, 2017, were not recorded in the accounts until paid in January 2018.
f. Prepaid insurance at December 31, 2017 was understated by P600 because this amount was included in 2017
expense. The insurance policy expires on December 31, 2018.
g. Income tax expense of P2,400 for the last part of the year ended December 31, 2017, was not recorded until paid in
January 2018.
h. Depreciation of P9,000 was not recorded for 2017.
Questions:
Based on the information given, answer the following:
1. Net income of 2017 is overstated by
a. P 40,400 b. P 39,800 c. P 38,400 d. P 29,400
2. Net income of 2018 is understated by
a. P 40,800 b. P 39,800 c. P 28,800 d. P 27,800
3. Operating expenses of 2017 is understated by
a. P 21,800 b. P 21,800 c. P 20,600 d. P 19,400
4. Operating expense of 2018 is overstated by
a. P 21,800 b. P 10,800 c. P 9,000 d. P 8,400
5. Cost of sales of 2018 is
a. Overstated by P18,000 c. Understated by P6,000
b. Understated by P18,000 d. Not affected with error

Problem IV
Tuburan Company was organized during 2014 by three technical experts to assemble (parts to be purchased from
suppliers) and market an electronic device that they had previously patented. No products were sold during 2014; however,
2015 and 2016 produced significant sales, but modest profits. During 2015, the company hired bookkeeper who, although
very industrious, had very little knowledge of accounting. Realizing this competency problem, the company is considering
engaging an outside independent CPA to as they said “straighten things out and make recommendations.” Among
numerous other accounting problems, adjusting entries have never been made. The bookkeeper stated that “the
transactions are recorded in the right way when they occur.”
The following 2017 transactions, and the way in which the bookkeeper recorded or explained them, are being discussed:
a. Inventory – ending 2016, P30,000; ending 2017, P47,000 (by inventory count).
Inventory of parts 17,000
Purchases 17,000
b. Depreciation – equipment (purchased at the beginning of 2016) cost, P80,000; estimated useful life, 10 years;
manufacturer’s recommended value at end of 5 years, P10,000.
Depreciation expense 7,000
Equipment 7,000
c. Unpaid wages at year-end 2016, P3,000; 2017, P11,000.
Record when paid, because that is when the wages requires the payment of resources and “it all events out anyway.”
d. Note payable, P60,000, five-year, 15%, interest payable each October 31; signed November 1, 2016.
Interest expense 9,000
Cash 9,000
Because this is the correct amount of interest each year
e. Contract to deliver six electronic devices, signed October 15, 2017, pending assembly, P45,000.

Due from customers 45,000

Sales 45,000
f. Property taxes for 2017, billed in November 2017, payable without penalty up to February 15, 2016, P9,000. Paid on
February 14, 2018.
February 14, 2018:
Property taxes 9,000
Cash 9,000
g. Advertising costs for December 2017, Christmas season, P17,000. Paid, within the 30-day credit period, on January 26,
2018.
January 26, 2018:
Advertising 17,000
Cash 17,000
Questions:
Based on the information given, answer the following:

1. Interest expense of the P60,000 note at December 31, 2017 is

a. P 10,500 b. P 9,000 c. P 7,500 d. P 1,500

2. Interest payable at December 31, 2017 is

a. P 9,000 b. P 7,500 c. P 1,500 d. P 750

3. Inventory at December 31, 2017 is

a. P 64,000 c. P 30,000
b. P 47,000 d. Cannot be determined

4. Wages expense at December 31, 2017 is

a. Understated by P 14,000 c. Understated by P 8,000
b. Understated by P 11,000 d. Correctly stated

5. Accrued expenses at December 31, 2017 is understated by

a. P 38,500 b. P 12,500 c. P 11,750 d. P 11,000

Problem V

Branzuela Corporation reported the following amounts of net income for the years ended December 31, 2015, 2016 and
2017:
2015 P127,000
2016 150,000
2017 128,500

You are performing the audit for the year ended December 31, 2017. During your examination, you discover the following
errors:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2016 P14,000 understated
December 31, 2017 P23,000 overstated
b. On December 29, 2017, Branzuela 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.
c. Branzuela records sales on the accrual basis but failed to record sales on account made near the end of each year as
follows
2015 P4,000
2016 5,000
2016 3,500
d. The company failed to record accrued office salaries as follows:
December 31, 2015 P10,000
December 31, 2016 14,000
e. On March 1, 2016, 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 P13,000
Common stock 10,000
Retained earnings 3,000

f. On July 1, 2016, Branzuela 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.

g. On January 1, 2017, Branzuela retired bonds with a book value of P120,000 for P106,000. The gain was incorrectly
deferred and is being amortized 10 years as a reduction of interest expense on other outstanding obligations.

Questions:

1. What is the adjusted net income for the year ended December 31, 2015?
a. P133,000 b. P121,000 c. P117,000 d. P113,000

2. What is the adjusted net income for the year ended December 31, 2016?
a. P159,000 b. P160,000 b. P179,000 c. P187,000

3. What is the adjusted net income for the year ended December 31, 2017?
a. P129,600 b. P131,600 c. P139,600 d. P142,600

4. What adjusting entry should be made on December 31, 2017 to correct the error described in item B?
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. Accounts payable 15,000
Retained earnings 15,000

5. The adjusting entry on December 31, 2016 to correct the error described in item E should include a debit to
a. Common stock P10,000 c. Additional paid in capital, P3,000
b. Retained earnings, P16,000 d. Miscellaneous expenses, P3,000

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wep/acctg29&30/correctionoferrors