Accounting For Correction of Errors: Exercises

CHAPTER 2 – Accounting for
Correction of Errors
Exercises
1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy for 3
years. On December 31, 2006, Rosete’s unadjusted trial valance showed a balance of
P270 for prepaid insurance and P13,230 for insurance expense. What amounts should
be reported for prepaid insurance and insurance expense in Rosete’s December 31, 2006
financial statements?
Prepaid Insurance Insurance Expense
a. P 9,900 P 3,600
b. P 10,200 P 3,600
c. P 10,200 P 3,300
d. P 10,200 P 3,030
2. An analysis of Palmes Corporation’s unadjusted prepaid expense account at December

31, 2006 revealed the following:
 An opening balance at P6,000 for Palmes comprehensive insurance policy. Palmes

had paid an annual premium of P12,000 on July 1, 2005.
 A P12,800 annual insurance premium payment made July 1, 2006.
 A P8,000 advance rental payment for a warehouse Palmes leased for 1 year
beginning January 1, 2006.
In its December 31, 2006 balance sheet, what amount should Palmes report as prepaid
expenses?
a. P 20,400 b. P 14,400 c. P 8,000 d. P 6,400
3. On October 1, 2006, a company sold services to a customer and accepted a note in

exchange with a P120,000 face value and an interest rate of 10%. The note requires
that both the principal and interest be paid at the maturity date, December 1, 2007.
The company’s accounting period is the calendar year. What adjusting entry (related to
this note) will be required at December 31, 2006 on the company’s books?
a. Deferred interest income 3,000

Interest receivable 3,000
b. Interest income 3,000
c. Interest receivable 3,000
Deferred interest income 3,000
d. Interest receivable 3,000
Interest income 3,000
4. What is the purpose of the following entry?
Supplies xxxx
Supplies expense xxxx
a. To recognize supplies used, if purchases of supplies are recorded in supplies.

b. To recognize supplies on hand, if purchases of supplies are recorded in supplies
expense.
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c. To record the purchase of supplies during or at the end of the period.
d. To close the expense account for supplies at the end of the period.
5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry
could be made on January 1?
a. Wages expense 15,000
Wages payable 15,000
b. Prepaid expense 15,000
Wages expense 15,000
c. Wages expense 15,000
Prepaid wages 15,000
d. Wages payable 15,000
6. A 3-year insurance policy was purchased on October1 for P6,000, and prepaid insurance
was debited. Assuming a December 31 year-end, what is the reversing entry at the
beginning of the next period?
a. None is required.
b. Cash 6,000
Prepaid insurance 6,000
c. Prepaid insurance 5,500
Insurance expense 5,500
d. Insurance expense 500
Prepaid insurance 500
7. A consulting firm started and completed a project for a client in December 2006. The
project has not been recorded on the consulting firm’s books, and the firm will not
receive payment from the client until February 2007. The adjusting entry that should be
made on the books of the consulting firm on December 31, 2006, the last day of the
firm’s fiscal year, is
a. Cash in transit xxx
Consulting revenue xxx
b. Consulting revenue receivable xxx
c. Unearned consulting rev. xxx
d. Consulting revenue receivable xxx
Unearned consulting revenue xxx
8. Cristie Company sublet a portion of its warehouse for 5 years at an annual rental of
P15,000, beginning on March 1. The tenant paid 1 year’s rent in advance, which Cristie
recorded as a credit to calendar-year basis. The adjustment on December 31 of the first
year should be
a. No Entry.
b. Unearned rental income 2,500
Rental income 2,500
c. Rental income 2,500
Unearned rental income 2,500
d. Unearned rental income 12,500
Rental income 12,500
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9. After a successful drive aimed at members of a specific national association, Online
Company received a total of P180,000 for 3-year subscriptions beginning April 1, 2006,
and recorded this amount in the unearned revenue account. Assuming Online records
adjustment only at the end of the calendar year, the adjusting entry required to reflect
the proper balances in the accounts at December 31, 2006 is to
a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000.
b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000.
c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000.
d. Debit unearned revenue for P45,000 and credit subscription revenue for P45,000.
10. Jay Corporation renewed an insurance policy for 3-years beginning July 1, 2006 and
recorded the P81,000 premium in the prepaid insurance accounts. The P81,000
premium represents an increase of P23,400 from the P57,600 premium charged 3 years
ago. Assuming Jay'’ records its insurance adjustments only at the end of the calendar
year, the adjusting entry required to reflect the proper balances in the insurance
accounts at December 31, 2006, Jay’s year-end is to
a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.
11. The 2006 financial statements of Hershey Company reported net income for the year
ended December 31, 2006 of 2 million. On July 1, 2007, subsequent to the issuance of
the 2006 financial statements, Hershey changed from an accounting principle that is not
generally accepted to one that is generally accepted. If the generally accepted
accounting principle had been used in 2006, net income for the year ended December
31, 2006 would have been decreased by 1 million. On August 1, 2007, Hershey
discovered a mathematical error relating to its 2006 financial statements. If this error
had been discovered in 2006, net income for the year ended would have been increased
by P500,000.
What amount, if any, should be included in net income for the year ended December 31,
2007 because of the items noted above?
a. P 0 c. P 500,000 increase
b. P 500,000 decrease d. P 1,000,000 decrease
12. Edcelle Company reported a retained earnings balance of P400,000 at December 31,
2005. In August 2006, Edcelle determined that insurance premiums of P60,000 for the
3-year period beginning January 1, 2005 had been paid and fully expensed in 2005.
Edcelle has a 30% income tax rate.
What amount should Edcelle report as adjusted beginning retained earnings in its 2006
statement of retained earnings?
a. P 442,000 b. P 440,000 c. P 428,000 d. P 420,000
13. Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31,
2005 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2006 resulted in a cumulative effect of P30,000
on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related
income taxes.
What amount should Colasissi report as prior period adjustments in 2006?

a. P 0 b. P 30,000 c. P 50,000 d. P 80,000
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Questions 14 and 15 are based on the following information.
On October 1, 2006, Yuri Retailers signed a 4-month, 16% note payable to finance the
purchase of holiday merchandise. At that date, there was no direct method of pricing the
merchandise, and the note’s market rate of interest was 11%. Yuri recorded the
purchase at the note’s face amount. All of the merchandise was sold by December 1,
2006. Yuri’s 2006 financial statements reported interest payable and interest expense
on the note for 3 months at 16%. All amounts due on the note were paid February 1,
2007.
14. Yuri’s 2006 cost of goods sold for the holiday merchandise was
a. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value.
b. Overstated by the difference between the note’s face amount and the note’s October
1, 2006 present value plus 11% interest for 2 months.
c. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value.
d. Understated by the difference between the note’s face amount and the note’s
October 1, 2006 present value plus 11% interest for 2 months.
15. As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which
of the following items was reported correctly?
12/31/06 12/31/06
Retained earnings Interest payable
a. Yes Yes
b. No No
c. Yes No
d. No Yes
16. On December 31, 2006, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The
terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2006 and arrived at Fineafle on January 5, 2007. Because of a clerical
error, the sale was not recorded until January 2007, and the merchandise, sold at 25%
markup, was included in Excel’s inventory at December 31, 2006.
As a result, Excel’s cost of goods sold for the year ended December 31, 2006 was
a. Understated by P 75,000 c. Understated by P 15,000
b. Understated by P 60,000 d. Correctly stated
17. For the past 3 years, Greenwish Co. has failed to accrue unpaid wages earned by
workers during the last week of the year. The amounts omitted, which are considered
material, were as follows:
December 31, 2003 P56,000

December 31, 2005 51,000
December 31, 2006 64,000
The entry on December 31, 2006 to correct for these omissions would include a
a. Credit to wage expense for P64,000
b. Debit to wage expense for P51,000
c. Debit to wage expense for P13,000
d. Credit to retained earnings for P64,000
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18. An audit of Funny Co. for 2006, its first year of operations, detected the following errors
made at December 31, 2006:
Failed to accrue P50,000 interest expense

Failed to record depreciation expense on office equipment of P80,000
Failed to amortize prepaid rent expense of P100,000
Failed to delay recognition of prepaid advertising expense of P60,000
The net effect of these errors was to overstate net income for 2006 by
a. P 130,000 b. P 170,000 c. P 230,000 d. P 290,000
19. While preparing its 2006 financial statements, Falfact Corp. discovered computational
errors in its 2005 and 2004 depreciation expense. These errors resulted in
overstatement of each year’s income by P25,000, net of income taxes. The following
amounts were reported in the previously issued financial statements:
2005 2004
Retained earnings, 1/1 P 700,000 P 500,000
Net income 150,000 200,000
Retained earnings, 12/31 P 850,000 P 700,000
Falfact’s 2006 net income is correctly reported at P180,000. Which of the following
amounts should be reported as prior-period adjustments and net income in Falfact’s
2006 and 2005 comparative financial statements?
Year Prior period adjustment Net income

a. 2005 - P150,000
2006 P (50,000) 180,000
b. 2005 (50,000) 150,000
2006 - 180,000
c. 2005 (25,000) 125,000
2006 - 180,000
d. 2005 - 125,000
2006 - 180,000
20. The following information appeared on Blight Inc.’s December 31 financial statements:
2005 2006
Assets P 1,000,000 P1,200,000
Liabilities 750,000 800,000
Contributed capital 120,000 120,000
Dividends paid 100,000 60,000
In preparing its 2006 financial statements, Blight discovered that it had misplaced a
decimal in calculating depreciation for 2005. This error overstated 2005 depreciation by
P10,000. In addition, changing technology had significantly shortened the useful life of
Blight’s computers. Based on this information, Blight determined that depreciation
should be P30,000 higher in 2006 financial statements.
Assuming that no correcting or adjusting entries have been made and ignoring income
taxes, how much should Blight report as 2006 net income?
a. P 230,000 b. P 210,000 c. P 180,000 d. P 170,000
5
Questions 21 and 22 are based on the following information.
An audit of Angelina Company has revealed the following four errors that have occurred
but have not been corrected:
 Inventory at December 31, 2005-P40,000, understated

 Inventory at December 31, 2006-P15,000, overstated
 Depreciation for 2005-P7,000, understated
 Accrued expenses at December 31, 2006-P10,000, understated
21. The errors cause the reported net income for the year ending December 31, 2006 to be
a. Overstated by P72,000 c. Understated by P28,000
b. Overstated by P65,000 d. Understated by P45,000
22. The errors cause the reported retained earnings at December 31, 2006 to be
a. Overstated by P65,000 c. Overstated by P25,000
23. Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to
cash of P50,500 and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500
24. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect c. Is understated by P9,000
b. Is overstated by P9,000 d. Is understated by P23,000
25. The beginning accumulated depreciation per record was P100,000. During the year, the
firm sold one of its machines recorded as follows:
Cash 270,000
Accumulated depreciation - machine 30,000
Machine 300,000
If the actual cash proceeds is P300,000, the correcting entry would be:
a. Cash 300,000
Machine 300,000
b. Cash 30,000
Gain on sale of machine 30,000
c. Accumulated depreciation - machine 30,000
d. Cash 300,000
Machine 270,000
26. Based on no. 25, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.
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27. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when
nominal accounts were already closed to income summary, but not yet closed to the
capital account. The correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases
c. P2,700 credit to purchases
d. P2,700 credit to accounts payable
28. Under the periodic inventory system, the ending inventory of P65,000 was erroneously
recorded as P56,000. The error had been discovered when all nominal and temporary
accounts were already closed to the real account. The correcting entry would require a
a. Debit to capital account c. Credit to cost of sale
b. Debit to income summary account d. Credit to owner’s capital
29. A sales discount of P5,000 was recorded as purchase discount. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P5,000 debit to purchase discount c. P5,000 credit to sales discount
b. P5,000 credit to purchase discount d. P5,000 credit to accounts payable
30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries

expense. The error had been discovered when all temporary accounts were already
closed to the capital account. The correcting entry will require a
a. P20,000 debit to owner’s capital c. P20,000 debit to salaries expense
b. P20,000 debit to owner’s drawings d. No correcting entry is necessary
31. A payment of P20,000 rent was recorded as a debit to rent income. The error had been
discovered when nominal accounts were already closed. The correcting entry would
require a
a. P20,000 debit to rent expense c. P40,000 credit to rent income
b. P20,000 debit to rent income d. No adjustment entry is necessary
32.A cash collection of P5,000 from customer’s open account was recorded as P500. The
error had been discovered when nominal accounts were still open. The correcting entry
would require a
a. P4,500 debit to accounts receivable c. P500 credit to accounts receivable
b. P4,500 debit to cash d. P500 credit to cash
33. A sale of merchandise on account of P3,200 was recorded as P2,300. The error had
been discovered when nominal accounts were already closed. The correcting would
require a
a. P900 debit to cash. c. P900 debit to sale
b. P900 debit to accounts receivable d. P900 credit to accounts receivable
34. A collection of P5,000 notes receivable, plus P500 interest income was recorded as debit
to cash P5,500 and credit to notes receivable P5,500. The error had been discovered
when nominal accounts were still open. The correcting entry would require a
a. P500 debit to cash. c. P500 credit to cash
b. P500 debit to accounts receivable d. P500 credit to interest income
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35.The accrued interest on a 12%, 60-day note of a customer dated December 1, 2006 with
a face value of P100,000 was not taken up as of December 31, 2004. The collection of
the note, which matured on January 31, 2007, was recorded as
Cash 102,000
Notes receivable 100,000
Interest Income 2,000
The error was discovered after collection. The correcting entry would require a
a. P2,000 debit to cash.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income
36.A return of merchandise amounting to P4,500 which was previously purchased on

account was recorded as
Accounts payable 5,400

Purchases 5,400
If the error had been discovered when the nominal accounts were still open, the
correcting entry would require a
a. P900 debit to purchase return
b. P900 debit to accounts payable
c. P900 credit to purchases
d. P900 credit to accounts payable
Answer:
1. c 2. a 3, d 4, b 5. d 6. a 7. b 8. d 9. d 10. d
11. d 12. c 13. c 14. a 15. d 16. b 17. c 18. b 19. a 20. c
21. b 22. b 23. c 24. a 25. b 26. c 27. b 28. c 29. b 30. d
31. d 32. b 33. b 34. d 35. c 36. d
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Problem 1
The first audit of the books of Luzon Company was made for the year ended December 31,
2006. In examining the books, the auditor found that certain items had been overlooked or
incorrectly handled in the last 3 years. These items are:
a. At the beginning of 2004, the company purchased a machine for P1,020,000 (salvage
value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line
depreciation, but failed to deduct the salvage value in computing the depreciation base
for the 3 years.
b. At the end of 2005, the company failed to accrue sales salaries of P90,000.
c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was determined
that the company owed an additional P170,000 in taxes related to 2004. The company
did not record a liability in 2004 or 2005 because the possibility of loss was considered
remote, and charged the P170,000 to a loss account in 2006.
d. Luzon Company purchased another company early in 2004 and recorded goodwill of
P900,000. Luzon had not amortized goodwill because its value had not diminished. The
estimated economic life of the goodwill is 20 years.
e. In 2006, the company wrote off P174,000 of inventory considered to be obsolete; this
loss was charged directly to Retained Earnings.
f. Year-end wages payable of P6,800 were not recorded because the bookkeeper though
that “they were immaterial.”
g. Insurance for a 12-month period purchased on November 1 of this year was charged to
insurance expense in the amount of P5,280 because “the amount of the check is about
the same every year.
Questions
1. The entry to record the adjustment of item “a” is:

a. Accumulated depreciation 34,000
Retained earnings 17,000
Depreciation expense 17,000
b. Accumulated depreciation 51,000
c. Accumulated depreciation 17,000
d. Accumulated depreciation 17,000
2. The entry to record the adjustment of item “c”:

a. No adjustment.
b. Retained earnings 170,000
Estimated liability 170,000
c. Loss on damages 170,000
Estimated liability 170,000
d. Loss on damages 170,000
Cash 170,000
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3. Net income of 2005 is overstated by:
a. P 460,400 b. P 318,400 c. P 107,000 d. P 73,000
4. Net income of 2006 is overstated by:

a. P 367,000 b. P 312,000 c. P 103,400 d. P 69,400
Solution
a. Accumulated depreciation 51,000
Depreciation expense (2006) 17,000
Retained earnings (2004 & 2005) 34,000
Salaries expense 90,000
c. No adjustment
d. No adjustment since no indication of impairment.
e. Loss on obsolete inventory 174,000
f. Salaries expense 6,800
Salaries payable 6,800
g. Prepaid insurance 4,400
2004 2005 2006

Item A 17,000 17,000 17,000
Item B (90,000) 90,000
Item C - - -
Item D
Item E (174,000)
Item F (6,800)
Item G ___________ __________ 4,400
Net Effect 17,000 (73,000 (69,400)
Answer:
1. B 2. A 3. D 4. D
Problem 2
A CPA is engaged by the Sony Corporation in 2006 to examine the books and records and to
make whatever corrections are necessary. An examination of the accounts discloses the
following:
a. Dividends had been declared on December 15 in 2004 and 2005 but had not been
entered in the books until paid.
b. Improvements in building and equipment of P9,600 had been debited to expense at the
end of April 2003. Improvements are estimated to have an 8-year life. The company
uses the straight-line method in recording depreciation and computes depreciation to
the nearest month.
c. The physical inventory of merchandise had been understated by P3,000 at the end of
2004 and by P4,300 at the end of 2005.
d. The merchandise inventories at the end of 2005 and 2006 did not include merchandise
that was then in transit and to which the company had title. This shipments of P3,800
and P5,500 were recorded as purchases in January of 2006 and 2004, respectively.
e. The company had failed to record sales commissions payable of P2,100 and P1,700 at
the end of 2005 and 2006, respectively.
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f. The company had failed to recognized supplies on hand of P1,200 and P2,500 at the end
of 2005 and 2006, respectively.
The Retained Earnings account showed the following postings:
Date Item Debit Credit

2004 Jan 1 Balance 81,000
Dec 31 Net income for year 18,000
2005 Jan 10 Dividends paid 15,000
Mar 6 Stock sold – excess
over par 32,000
Dec31 Net loss for year 11,200
2006 Jan 10 Dividend paid 15,000
Dec 31 Net loss for year 12,400
Questions:
1. Corrected net income of 2004
a. P 19,800 b. P 15,600 c. P 13,600 d. P 16,800
2. Corrected net loss of 2005

a. P 16,000 b. P 14,000 c. P 12,000 d. P 10,000
3. Corrected net loss of 2006

a. P 16,200 b. P 15,800 c. P 15,200 d. P 12,800
4. Adjusted retained earnings at December 31, 2004

a. P 109,200 b. P 106,400 c. P 94,600 d. P 85,000

a. P 71,200 b. P 69,000 c. P 67,600 d. P 65,000

a. P 51,400 b. P 49,800 c. P 49,000 d. P 48,200
Solution
2004 2005 2006
Unadjusted Net income/Loss 18,000 (11,200) (12,400)
Item B (1,200) (1,200) (1,200)
Item C 3,000 (3,000)
4,300 (4,300)
Item D – unrecorded ending inv. 3,800 (3,800)
5,500
- unrecorded purchases (3,800) 3,800
(5,500)
Item E (2,100) 2,100
(1,700)
Item F 1,200 (1,200)
___________ __________ 2,500
Adjusted net income/loss 19,800 (12,000) (16,200)
Retained earnings – beg. 81,000 94,600 67,600
Item A (15,000) (15,000)
Item B – error in recording improv. 9,600
- unrecorded depreciation (800) _________ ____________
Retained earnings - end 94,600 67,600 51,400
Answer:
1. A 2. C 3. A 4. C 5. C 6. A
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Problem 3
A partial trial balance of Josh Alejandro Corporation is as follows on December 31, 2006:
Dr.____ ____Cr.____
Supplies on hand P 13,500
Accrued salaries and wages P 7,500
Interest receivable on investments 25,500
Unearned rent -0-
Accrued interest payable 75,000
Additional adjusting data:
a. A physical count of supplies on hand on December 31, 2006, totaled P5,500.
b. Through oversight, the Accrued Salaries and Wages account was not changed during
2006. Accrued salaries and wages on 12/31/06 amounted to P22,000.
c. The interest receivable on investments account was also left unchanged during 2006.
Accrued interest on investments amounts to P21,750 on 12/31/06.
d. The unexpired portions of the insurance policies totaled P325,000 as of December 31,
2006.
e. P140,000 was received on January 1, 2005, for the rent of a building for both 2005 and
2006. The entire amount was credited to rental income.
f. Depreciation for the year was erroneously recorded as P25,000 rather than the correct
figure of P250,000.
g. A further review of depreciation calculations of prior year revealed that depreciation of

P36,000 was not recorded. It was decided that this oversight should be corrected by a
prior period adjustment.
Questions
1. The accrued salaries and wages at year-end is:
a. P 29,500 b. P22,000 c. P 14,500 d. P 7,500
2. How much is the adjusted salaries and wages at year-end assuming that the balance of
this account in the book is P350,000?
a. P 379,500 b. P 372,000 c. P 364,500 d. P 342,500
3. Prepaid insurance at year-end is:

a. P 450,000 b. P 325,000 c. P 125,000 d. P 0
4. Supplies on hand at year-end is:
a. P 13,500 b. P 8,000 c. P 5,500 d. P 2,500
5. Depreciation expense at year-end is:

a. Understated by P225,000
b. Overstated by P225,000
c. Understated by P261,000
d. Overstated by P261,000
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Solution
1. Supplies expense 8,000
Supplies on hand 8,000
2. Accrued salaries and wages 7,500
Salaries and wages expense 7,500
To reverse accrued salaries.
Salaries and wages expense 22,000
Accrued salaries and wages 22,000
3. Interest income 25,500
To reverse accrued income.
Interest income 21,750
4. Insurance expense 125,000
5. Retained earnings 70,000
Rent income 70,000
6. Depreciation expense 225,000
Accumulated depreciation 225,000
Answer:
1. B 2. C 3. B 4. C 5. A
Problem 4
The before tax income for Franzine Gomez Co. for 2005 was P303,000 and P232,200 for
2006. However, the accountant noted that the following errors had been made:
1. Sales for 2005 included amounts of P114,600 which was received in cash during 2005,
but for which the related products were delivered in 2006. Title did not pass to the
purchaser until 2006.
2. The inventory on December 31, 2005, was understated by P25,920.
3. The bookkeeper in recording interest expense for both 2005 and 2006 on bonds payable
made the following entry:
Interest expense 15,000

Cash 15,000
The bonds have a face value of P250,000 and pay a stated interest rate of 6%. They
were issued at a discount of P15,000 on January 1, 2005, to yield an effective interest of
7%. (Assume that the effective yield method should be used.)
4. Ordinary repairs to equipment had been erroneously charged to the Equipment account
during 2005 and 2006 for P25,500 and P30,000, respectively. The company applies a
rate of 10% to the balance in the equipment account at the end of the year in its
determination of depreciation charges.
Questions
1. The adjusted 2005 net income is:

a. P 422,120 b. P 419,120 c. P 192,920 d. P 189,920
2. The adjusted 2006 net income is:

a. P 294,878 b. P 291,878 c. P 180,278 d. P 65,678
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3. 2005 net income is overstated by:
a. P 232,200 b. P 229,200 c. P 113,080 d. P 3,000
4. 2006 net income is:

a. Understated by P62,678
b. Understated by P59,678
c. Overstated by P166,522
d. Overstated by P51,922
5. The correcting entry in item “1” is:

a. Accounts receivable 114,600
Sales 114,600
b. Sales 114,600
Accounts receivable 114,600
c. Retained earnings 114,600
Sales 114,600
d. Sales 114,600
Solution
Sales 114,600
2. Cost of sales (beg. inv) 25,920
Discount on bonds payable 3,002
Int. paid Int. exp. Amort. Carrying
Value
235,000
2002 15,000 16,450 1,450 236,450
2003 15,000 16,552 1,552 238,002

Repairs expense 30,000
Equipment 55,500
2002 2003
Unadjusted net income 303,000 232,200
Item 1 (114,600) 114,600
Item 2 25,920 (25,920)
Item 3 (1,450) (1,552)
Item 4 (25,500) (30,000
- error in recording depreciation 2,550 2,550
__________ 3,000
Adjusted net income 189,920 294,878
Answer:
1. D 2. A 3. C 4. A 5. C
14
Problem 5
You have been assigned to examine the financial statements of Macelle Company for the
year ended December 31, 2006. Below is the Balance Sheet of the company.
Current assets 700,000 Current liabilities 250,000

Non-current assets 2,000,000 Non-current liabilities 900,000
_________ Stockholders’ Equity 1,550,000
Total Assets 2,700,000 Total liabilities/SHE 2,700,000
In the course of your audit, you discover the following situations:
1. Depreciation of P16,000 for 2006 on delivery vehicles was not recorded.
2. The physical inventory count on December 31, 2005, improperly excluded merchandise
costing P95,000 that had been temporarily stored in a public warehouse. Macelle uses
periodic inventory system.
3. The physical inventory count on December 31, 2006, improperly included merchandise
with a cost of P42,500 that had been recorded as a sale on December 27, 2006.
4. A collection of P28,000 on account from a customer received on December 31, 2006

was not recorded until January 2, 2007.
5. In 2006, the company sold for P18,500 fully depreciated equipment that originally cost
P110,000. The company credited the proceeds from the sale to the Equipment account.
6. During November 2006, a competitor company filed a patent-infringement suit against

Macelle claiming damages of P1,100,000. The company’s legal counsel has indicated
that an unfavorable verdict is probable and a reasonable estimate of the court’s award
to the competitor is P625,000. The company has not reflected or disclosed this situation
in the financial statements.
7. Macelle has a portfolio of trading securities. No entry has been made to adjust to
market. Information on cost and market value is as follows:
COST MARKET
December 31, 2005 P 190,000 P 190,000
December 31, 2006 168,000 164,000
8. At December 31, 2006, an analysis of payroll information shows accrued salaries of

P36,600. The Accrued Salaries payable account had a balance of P48,000 at December
31, 2006, which was unchanged from its balance at December 31, 2005.
9. A large piece of equipment was purchased on January 3, 2006, for P1,600,000 and was
charged to Repairs Expense. The equipment is estimated to have a service life of 8 years
and no residual value. Macelle normally uses the straight – line depreciation method for
this type of equipment.
10. A P75,000 insurance premium paid on July 1, 2005, for a policy that expires on June 30,
2009, was charged to insurance expense.
11. A trademark was acquired at the beginning of 2005 for P250,000. No amortization has
been recorded since its acquisition. Trademark has an economic life of 5 years.
15
Questions
1. Current assets at year-end is:
a. P 776,000 b. P 695,000 c. P 691,000 d. P 678,500
2. Non-current assets at year-end is:

a. P 3,498,500 b. P 3,402,500 c. P 3,302,500 d. P 3,298,500
3. Current liabilities at year-end is:

a. P 911,600 b. P 863,600 c. P 286,600 d. P 238,600
4. Non-current liabilities at year-end is:

a. P 1,561,600 b. P 1,525,000 c. P 1,513,600 d. P 900,000
5. The net income of 2006 is understated by:

a. P 622,400 b. P 603,900 c. P 568,400 d. P 559,900
6. The total amount of fundamental error is:

a. P 176,000 b. P 157,500 c. P 107,500 d. P 25,000
7. Total Stockholders’ Equity at year-end is:

a. P 2,329,900 b. P 2,229,900 c. P 2,227,400 d. P 2,099,400
8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment
Cost of sales 42,500
c. Cost of sales 42,500
d. Retained Earnings 42,500
Inventory 42,500
Solution
1. Depreciation expense 16,000
2. Cost of sales (beg. inv) 95,000
3. Cost of sales 42,500
Inventory 42,500
4. Cash 28,000
5. Accumulated depreciation 110,000
Machinery 91,500
Gain on sale 18,500
6. Loss on damages 625,000
Estimated liability on damages 625,000
7. Unrealized holding loss 26,000
Valuation allowance 26,000
Market value – beg. 190,000
Market value – end 164,000
Unrealized holding loss 26,000
8. Salaries payable 48,000
To reverse accrued salaries.
Salaries payable 36,600
9. Equipment 1,600,000
Repairs expense 1,600,000
16
10. Insurance expense 25,000
11. No amortization since no information about its impairment.
Answer:
1. C 2. B 3. B 4. D 5. B 6. A 7. A 8. D
Problem 6
Matias Corporation requires audited financial statements for credit purposes. After making
normal adjusting entries, but before closing the accounting records for the year ended
December 31, 2006. Matias’s controller prepared the following financial statements for
2006:
Matias Corporation
STATEMENT OF FINANCIAL POSITION
December 31, 2006
Assets
Cash 1,225,000
Marketable equity securities 125,000
Accounts Receivable 460,000
Allowance for doubtful accounts ( 55,000)
Inventories 530,000
Property and equipment 620,000
Accumulated Depreciation ( 280,000)
Total Assets 2,625,000
Liabilities and Stockholders’ Equity

Accounts payable and accrued liabilities 1,685,000
Income tax payable 110,000
Common stock, P20 par 300,000
Additional paid-in capital 75,000
Total liabilities and stockholders’ equity 2,625,000
Matias Corporation
STATEMENT OF INCOME
For the Year Ended December 31, 2006
Net Sales 1,700,000
Gross Profit 1,130,000
Operating Expenses
Selling and administrative 448,000
Depreciation 42,000
Income before income tax 640,000
Income tax expense 192,000
Net Income 448,000
Matias’s tax rate for all items was 30% for all affected years, and it made estimated tax
payments when due. Matias has been profitable in the past and expects results in the future
to be similar to 2006. During the course of the audit, the following additional information
(not considered when the above statements were prepared) was obtained:
1. The investment portfolio consists of short-term investment, classified as available-for-

sale, for which total market value equaled cost at December 31, 2005. On February 2,
17
2006, Matias sold one investment with a carrying value of P100,000 for P130,000. The
total of the sale proceeds was credited to the investment account.
2. At December 31, 2006, the market value of the remaining securities in the portfolio was
P142,000.
3. The P530,000 inventory total, which was based on a physical count at December 31,
2006, was priced at cost. Subsequently, it was determined that the inventory cost was
overstated by P66,000. At December 31, 2006, the inventory’s market value
approximated the adjusted cost.
4. Pollution control devices costing P48,000, which is high in relation to the cost of the
original equipment, were installed on December 29, 2005, and were charged to repairs in
2005.
5. The original equipment referred to in Item 4, which had a remaining useful life of six
years on December 20, 2005, is being depreciated by the straight-line method for both
financial and tax reporting.
6. A lawsuit was filed against Matias Corporation in October 2006 claiming damages of
P250,000. Company’s legal counsel believes that an unfavorable outcome is probable,
and a reasonable estimate of the court’s award to the plaintiff is P60,000, which will be
paid in 2007 if the case is settled.
Questions
1. Marketable Equity Securities at year-end is:
a. P 155,000 b. P 125,000 c. P 95,000 d. P 82,000
2. Allowance for market decline in value of marketable equity security at year-end is:
a. P 0 b. P 8,000 c. P 10,000 d. P 13,000
3. Inventory at year-end is:

a. P 464,000 b. P 512,000 c. P 530,000 d. P 596,000
4. Cost of sales at year-end is:

a. P 636,000 b. P 570,000 c. P 550,000 d. P 504,000
5. Net income of the company is:

a. P 399,700 b. P 379,000 c. P 366,100 d. P 331,000
Solution
1. Marketable equity securities 30,000
Gain on sale 30,000
2. Loss on market decline 13,000
Allowance for market decline 13,000
3. Cost of sales 66,000
Inventory 66,000
4. Equipment 48,000
5. Depreciation 8,000
6. Loss on damages 60,000
Estimated liability on damages 60,000
Answer:
1. A 2. D 3. A 4. A 5. C
18
Problem 7
Long established a retail business in 2004. Early in 2007, Long entered into negotiations
with Short with the intent to form a partnership. You have been asked by Long and Short
to check Long’s books for the past three years to help Short evaluate the earnings potential
of the business.
The net incomes reported on statements submitted to you were as follows:
Year ending 12/31

2004 2005 2006
Income, pretax P63,000 P 70,763 P 61,880
During the examination of the accounts, you found the data given below:
For year ended Dec. 31

2004 2005 2006
Omission from the books
a. Accrued expenses at end of year P 15,120 P 14,658 P 32,368

b. Earned (uncollected) revenue at end
of year 1,400
c. Prepaid expenses at end of year 6,314 8,470 9,842
d. Unearned revenue (collected in advance)
at end of year 4,270
Goods in transit at end of year omitted from

inventory
e. Purchase for which the entry had been made

(ownership passed) 18,270 21,640
f. Purchase for which the entry had not been made
(ownership not passed) 11,970 13,710
Other points requiring considerations:
g. On January 1, 2006, sold operational equipment for P31,500 that originally cost P35,000
on January 1, 2004. Cash was debited for P31,500 and equipment was credited for
P31,500. The asset sold was depreciated in 2004 and 2005 but not on the 2006 on the
basis of a 10-year life and no residual value.
h. No allowance for bad debts has been set up. An analysis of accounts receivable as of
December 31, 2006, indicates that the allowance account should have a balance of
P14,000, of which P3,500 relates to 2004, P4,900 to 2005, and P5,600 to 2006.
Questions
1. Adjusted net income of 2004 is:
a. P 85,834 b. P 82,334 c. P 52,094 d. P 39,466

a. P 81,669 b. P 81,081 c. P 80,157 d. P 76,769

a. P 86,502 b. P 56,682 c. P 51,082 d. P 42,682
19
4. Inventory at year-end is understated by:
a. P 3,370 b. P 7,930 c. P 21,640 d. P 35,350
5. Accrued expenses at year-end is:

b. Understated by P32,368 d. Understated by P17,710
Solution
2004 2005 2006

Unadjusted net income 63,000 70,763 61,880
Item A (15,120) 15,120
(14,658) 14,658
(32,368)
Item B 1,400 (1,400)
Item C 6,314 (6,314)
8,470 (8,470)
9,842
Item D (4,270) 4,270
Item E 18,270 (18,270)
21,640
Item F - - -
Item G 3,500
Item H (3,500) (4,900) (5,600)
Adjusted net income 52,094 81,081 51,082
Answer:
1. C 2. B 3. C 4. C 5. B
Problem 8
VILLA LYDIA CO. The records of the Company have not been examined for the three-year
period ended December 31, 2006. As a result of your audit of the records for the year
ended December 31, 2006 and your review of the records of the two prior years, it is
necessary to revise the net income and the retained income based upon the audited data,
which follows:
The company’s retained income at December 31, 2006 follows:
Balance, 12/31/04 P 90,000

Net income, 2005 100,000
Net income, 2006 110,000
Balance, 12/31/06 P300,000
From your examination, you obtained the following information which must be taken into
consideration at the close of the year involved:
December 31, 2004
1. Goods consigned out to consignees are included in the inventory at P120,000, which is
20 percent in excess of cost.
2. Equipment with a 10-year-life was purchased for P30,000 and charged to expense on
December 31.
3. The following liabilities are omitted from the records:
Materials included in inventory P 3,000
Accrued taxes 4,100
20
December 31, 2005
4. Uncollectible accounts receivable of P9,000 are to be written off.

5. Marketable Securities costing P15,000 were at a market value of only P9,000.
6. Gain of P3,000 on sale of fully depreciated equipment was credited to the allowance for
depreciation.
7. Land cost of P9,000 had been erroneously charged to expense.
8. The inventory is overstated by P14,300 because of an error in footing an inventory
price sheet.
9. Depreciation was omitted; P5,000 should be provided.
December 31, 2006
10. The following liabilities are omitted from the records:

For purchases of new machinery on December 31, 2006 P12,000
Accrued taxes 5,900
Questions
a. P 119,400 b. P 110,800 c. P 102,600 d. P 90,800

a. P 89,800 b. P 98,600 c. P 115,400 d. P 145,400
3. Adjusted retained earnings of 2004 is:

a. P 112,900 b. P 109,900 c. P 92,900 d. P 89,900

a. P 180,700 b. P 203,700 c. P 212,500 d. P 212,300

a. P 416,200 b. P 416,000 c. P 319,100 d. P 296,100
6 The entry to correct information “number 3” at December 31, 2006 is:

a. Retained earnings 4,100
Accrued taxes 4,100
b. Cost of sales 3,000
Cost of sales 3,000
Accrued taxes 4,100
d. No adjusting entry is necessary.
9. The entry to correct information “number 4” at December 31, 2006 is:

a. Allowance for bad debts 9,000
Allowance for bad debts 9,000
d. No adjusting entry is necessary
21
8. Adjusted net income of 2004 (assuming P85,000 is recorded as net income of 2004) is:
a. P 116,900 b. P 115,000 c. P 107,900 d. P 87,900
Solution
1. No adjustment since the 2004 financial statement was not affected.
2. Equipment 30,000
3. No adjustment since the 2004 financial statement was not affected.
4. Allowance for bad debts 9,000
Allowance for market decline 6,000
6. Accumulated depreciation 3,000
7. Land 9,000
10. Machinery 12,000
Accounts payable – others 12,000
Taxes 5,900
Accrued taxes 5,900
2004 2005 2006

Item 1 (20,000) 20,000
Item 2 30,000 (3,000) (3,000)
Item 3 (3,000) 3,000
(4,100) 4,100
Item 4 - - -
Item 5 (6,000)
Item 6 3,000
Item 7 9,000
Item 8 (14,300) 14,300
Item 9 (5,000)
Item 10 _________ _________ (5,900)
Retained earnings - beg 90,000 203,700
Adjustments:
Item 1 (20,000)
Item 2 30,000
Item 3 (3,000)
(4,100) _________
Retained earnings - end 203,700 319,100
Answer:
1. B 2. C 3. C 4. B 5. C 6. D 7. A 8. D
Problem 9
The Corporation prepared its own income statement for the years 2005 and 2006. The
President was not satisfied and decided to engage the services of a CPA. The following
errors were discovered by the CPA:
___2005__ ___2006___
Net income after income tax P 123,250 P 156,250
Inventory understatement at year-end P - P 12,500
Prepaid expenses not taken up 5,000 15,000
Merchandise purchased on account not
Recorded as liability but included in
22
inventory 25,000
Unearned rent received taken into income 9,000
Accrued taxes unrecorded 20,000 15,000
Questions
1. Net income of 2005 is:
a. P 163,250 b. P 108,250 c. P 83,250 d. P 73,250

a. P 199,750 b. P 174,750 c. P 144,750 d. P 142,250
Solution
2005 2006
12,500
5,000 (5,000)
15,000
(25,000) 25,000
(9,000)
(20,000) 20,000
__________ (15,000)
Answer:
1. C 2. A
Problem 1O
Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash
basis during the year
Wizard is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2006 financial statements prepared on the accrual basis of
accounting from Wizard. As Wizard’s external auditor, you were called upon to assist in
preparing the financial statements. The following information were obtained during the
course of your engagement:
Wizard Company
TRIAL BALANCE
December 31, 2006
Debits Credits
Cash P448,000
Accounts receivable, 12/31/05 283,500
Inventory, 12/31/05 1,085,000
Furniture & Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated depreciation, 12/31/05 P 567,000
Wizard, Drawings
Wizard, Capital, 12/31/05 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries expense 3,045,000
Taxes and licenses 217,000
Rent expense 598,500
Utilities expense 220,500
Living expenses 227,500 _________
P 14,472,500 P 14,472,500
23
Additional information:
1. At December 31, 2006, amounts due from customers totaled P415,000.
2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.
3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31,
2006 and December 31, 2005 respectively.
4. The inventory totaled P1,274,000 based on a physical count of the goods at December
31, 2006. The inventory was priced at cost, which approximates market value.
5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage
for one year. The premium on the previous policy, which expired on April 30, 2006, was
P136,500.
6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant
lot adjacent Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard
paved and fenced in the lot at a cost of P787,500. The improvements were completed on
April 1, 2006, and estimated to have a useful life of fifteen years. No provision for
depreciation has been recorded. Depreciation on furniture and fixtures was P210,000 for
2006.
7. Accrued expenses at December 31, 2006 and 2005 were as follows:

2006 2005
Taxes and licenses P33,750 P20,250
Utilities 36,000 24,750
P69,750 P45,000
8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome
is probable and that a reasonable estimate of the settlement is P3,000,000.
9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also
receives P4,375 per week for living expenses.
Questions
Determine the balances of the following under the accrual basis of accounting.
1. Accounts Receivable
a. 415,000 b. P 283,500 c. P 131,500 d. P 152,000
2. Accounts Receivable, net

a. P 408,425 b. P 404,625 c. P 394,250 d. P 262,500
3. Inventory
a. P 1,274,000 b. P 1,085,000 c. P 189,000 d. P 896,000
4. Prepaid Insurance
a. P 147,000 b. P 96,250 c. P 50,750 d. P0
5. Property and equipment, net

a. P 2,856,000 b. P 2,616,469 c. P 2,039,625 d. P 1,858,500
24
6. Accounts payable
a. P 533,750 b. P 523,750 c. P 297,500 d.P 236,250
7. Accrued Expenses
a. P 114,750 b. P 69,750 c. P 24,750 d. P0
8. Wizard, Drawings
a. P 707,500 b. P 480,000 c. P 227,500 d. P0
9. Wizard, Capital, 12/31/05

a. P 2,226,000 b. P 2,181,000 c. P 2,180,500 d. P 2,135,500
10. Sales
a. P 11,842,500 b. P 11,559,000 c. P 11,427,500 d. P 11,296,000
11. Purchases
a. P 5,873,000 b. P 5,575,500 c. P 5,339,250 d. P 5,103,000
12. Salaries Expense

a. P 3,272,500 b. P 3,045,000 c. P 2,655,000 d. P 2,565,000
13. Taxes and licenses

a. P 250,750 b. P 230,500 c. P 217,000 d. P 203,500
14. Insurance expense

a. P 197,750 b. P 147,000 c. P 152,250 d. P 101,500
15. Utilities expense

a. P 256,500 b. P 231,750 c. P 220,500 d. P 195,750
16. Doubtful account expense

a. P 20,750 b. P 10,375 c. P 6,575 d. P 0
17. Depreciation expense

a. P 294,375 b. P 249,375 c. P 239,531 d. P 210,000
18. Cost of sales

a. P 5,386,500 b. P 5,368,500 c. P 5,150,250 d. P 4,065,000
19. Estimated loss from lawsuit

a. P 4,000,000 b. P 3,000,000 c. P 500,000 d. P0
Solution
1. A - P415,000 given in item no. 1
2. C - P394,250 (P415,000 – P20,750 item no. 2)
3. A - P1,274,000 given in item no. 4
4. C - P152,250 x 4/12 = P50,750
5. C
Furniture & fixtures 2,068,500
Leasehold improvements 787,500
Less: Accumulated dep’n – 1/1/02 ( 567,000)
2002 Depreciation – improve. ( 39,375)
2002 Dep’n – furniture ( 210,000)
Carrying value – 2002 2,039,625
6. A - P533,750 given in item no. 3
7. B - P69,750 given in item no. 7
25
8. A
Salaries – P40,000 x 12 - P 480,000
Living allowance P4,375 x 52 weeks - 227,500
Total 707,500
9. B
Capital – beg. 2,180,500
Omission of prepaid expense in 2001 45,500
Omission of accrued expenses in 2001 ( 45,000)
Total 2,181,000
10. B
Sales – cash basis - 11,427,500
+ AR – end - 415,000
- AR – beg - 283,500
Sales – accrual basis - 11,559,000
11. B
Purchases – cash basis - 5,339,250
+ AP – end - 533,750
- AP – beg - 297,500
Purchases – accrual basis - 5,575,500
12. D
Salaries per record - 3,045,000
- Salaries of the proprietor * - 480,000
Adjusted Salaries - 2,565,000
* Salaries of the proprietor for a partnership is considered as part of profit distribution
13. B
Taxes and licenses – cash basis - 217,000
+ Accrued taxes – end - 33,750
- Accrued taxes – beg - 20,250
Taxes and licenses – accrual basis - 230,500
14. B
Insurance expense – cash basis - 152,250
+ Prepaid insurance – beg - 45,500
- Prepaid insurance – end - 50,750
Insurance expense – accrual basis - 147,000
15. B
Utilities – cash basis - 220,500
+ Accrued utilities – end - 36,000
- Accrued utilities – beg - 24,750
Utilities – accrual basis - 231,750
16. A – given in item # 2
17. B – refer to Question # 5 question
18. A
Beginning inventory - 1,085,000
Purchases - 5,575,500
Ending inventory - (1,274,000)
Cost of Sales - 5,386,500
19. C
Since there is a comprehensive insurance policy for the damage, only P500,000 will be charged as loss (3M –
2.5M)
Problem 11
You have been engaged to examine the financial statements of Vince Corporation for the
year ended December 31, 2006. In the course of your examination, you have ascertained
the following information:
1. Vince uses the allowance method of accounting for uncollectible trade accounts
receivable. The allowance is based upon 3% of past due accounts (over 120 days) and
1% of current accounts as of the close of each month. Due to the changing economic
conditions and climate, the amount of past due accounts has increased significantly, and
management has decided to increase the percentage based on past due accounts to 5%.
The following balances are available:
26
As of As of
Nov. 30, 2006 Dec. 31, 2006
Debit Credit Debit Credit
Accounts Receivable P 390,000 - P 430,000 -

Past due accounts (included
in Accounts Receivable) 12,000 - 30,000 -
Allowance for uncol-
lectible accounts - P 28,000 9,000 -
2. The merchandise inventory on December 31, 2005 did not include merchandise having a
cost of P7,000.00 which was stored in a public warehouse. Merchandise having a cost of
P3,000.00 was erroneously counted twice and included twice in the merchandise
inventory on December 31, 2006. Vince uses a periodic inventory system.
3. On January 2, 2006, Vince had a new machine delivered and installed in its new factory.
The cost of this machine was P97,000.00 and the machine is being depreciated on a
straight-line method over an estimated useful life of 10 years. When the new machine
was installed, Vince paid for the following items which were not included in the cost of
the machine, but were charged to repairs and maintenance:
Delivery Expense - P 2,500.00
Installation Costs - 8,000.00
Rearrangement of related Equipment - 4,000.00
P14,500.00
4. On May 3, 2006, Vince exchanged 500 shares of treasury stock (P50.00 par value
common stock) for a parcel of land to be used as a site for a new factory. The treasury
stock had a cost P70.00 per share when it was acquired and on May 03, 2006, it had a
fair value of P80.00 per share. Vince received P2,000.00 when an existing building on
the land was sold for scrap. The land was capitalized at P40,0000.00 and Vince recorded
a gain of P5,000.00 on the sale of its treasury stock.
You found the following journal entries in the books:

Land . . . . . . . . . . . . . . . P 40,000.00
Treasury stock . . . . . . . . . . . . . . P 35,000.00
Gain on Sale of treasury stock . . . . . 5,000.00
Cash . . . . . . . . . . . . . . . P 2,000.00
Miscellaneous Income . . . . . . . . . . P 2,000.00
5. On January 02, 2006, Vince Corporation established a noncontributory defined benefit

plan covering all employees and contributed P 1,000,000.00 to the plan and charged this
amount to the “pension expense”. At December 31, 2006, Vince determined that the
2006 current service and interest costs on the plan amount to P 620,000,00. The
expected and actual rate of return on plan assets for 2006 was 10%.
Questions
1. The allowance for uncollectible accounts to be reported on the Balance Sheet is:
a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00
2. Doubtful account expense at December 31, 2006 is:

a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00
27
3. 2006 merchandise inventory is:
a. Understated by P 10,000.00 c. Overstated by P 3,000.00
b. Understated by P 4,000.00 d. Overstated by P 4,000.00
4. If no proper correcting entries were made at December 31, 2005, by how much will
2005 net income before income taxes be overstated or understated?
a. Understated by P7,000.00 c. Overstated by P 7,000.00
b. Understated by P4,000.00 d. Overstated by P 4,000.00
5. Machinery and equipment account should be reported in the balance sheet (net of
accumulated depreciation) at December 31, 2006:
a. P 100,350.00 b. P 110,050.00 c. P 111,500.00 d. P 101,800.00
6. Land account should be reported in the balance sheet at December 31, 2006:
a. P 35,000.00 b. P 33,000.00 c. P 40,000.00 d. P 38,000.00
7. What should be reported at December 31, 2006 as prepaid pension cost?

a. P 620,000.00 b. P 520,000.00 c. P 1,000,000.00 d. P 480,000.00
8. What amount should be reported as pension expense in 2006?

a. P 620,000.00 b. P 520,000.00 c. P 1,000,000.00 d. P 480,000.00
9. How much gain should be reported on item no. 4?

a. P 5,000.00 b. P 15,000.00 c. P 10,000.00 d. P 0
10. If no proper correcting entries were made at December 31, 2006, by how much will
2006 net income before income taxes be overstated or understated?
a. Understated by P 493,450.00 c. Overstated by P 539,050.00
b. Understated by P 534,050.00 d. Overstated by P 498,450.00
Solution
(1) Doubtful Account Expense 14,500.00
Allowance for D/A 14,500.00
Required allowance as of 12.31.2006
-on past due accounts (5% x P30,000.00) P 1,500.00
-on current accounts (1% x P400,000.00) 4,000.00
Total P 5,500.00
Unadjusted “debit” balance of Allowance for D/A 9,000.00
Additional Provision (expense) P14,500.00
(2) a. Merchandise Inventory, 01.01.2006 7,000.00
Retained Earnings 7,000.00
(to correct understatement of inventory at end of 2005)
b. Cost of Sales 3,000.00
Merchandise Inventory, 12.31.2006 3,000.00
(to correct overstatement ending inventory for 2006)
(3) a. Machinery 14,500.00
Repairs and Maintenance 14,500.00
(to reclassify delivery and installation costs)
b. Depreciation Expense 1,450.00
Accumulated Depreciation 1,450.00
(to provide for depreciation for items not capitalized)
(4) Miscellaneous Income 2,000.00
Gain on Sale of Treasury Stock 5,000.00
Land 2,000.00
APIC-T/S 5,000.00
(to correct client’s entry on the purchase of land)
(5) Prepaid Pension Cost 480,000.00
Pension Expense 480,000.00
(to correct client’s entry in the treatment of prepaid pension cost)
28
Current Service and interest cost P 620,000.00
Expected return on Plan Asset
(P 1,000,000.00 x 10%) ( 100,000.00)_
Pension Expense P 520,000.00
Reported pension expense 1,000,000.00
Prepaid Pension Cost P 480,000.00
Answer:
1. C 2. A 3. C 4. A 5. A 6. D 7. D 8. B 9. D 10. D
Problem 12
Ron-Ron Storage underwent a restructuring in 2006. The company conducted a thorough
internal audit, during which the following facts were discovered. The audit occurred during
2006 before any adjusting entries or closing entries are prepared.
a. Additional printers were acquired at the beginning of 2004 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, 2005, 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:

Common stock 4,000
The shares had a market price at the time of P10 per share.
e. At the end of 2005, the company failed to accrue interest expense that accrued during
the last four months of 2005 on bonds payable. The bonds which were issued at face
value mature in 2010. The following entry was recorded on March 1, 2006, when the
semi-annual interest was paid:

Cash 180,000
f. A three-year liability insurance policy was purchased at the beginning of 2005 for
P216,000. The full premium was debited to insurance expense at the time.
Questions

b. Understated by P9,000 d. Understated by P7,200
2. Net income of 2005 is

a. Understated by P374,200 c. Understated by P89,800
b. Understated by P134,200 d. Overstated by P81,800
29
3. Net income of 2006 is
4. Accrued interest on Bonds Payable is

a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000
Solution
2004 2005 2006
A 9,000
(1,800) (1,800) (1,800)
B
C 112,000 (112,000)
D
E (120,000) 120,000
(120,000)
F _________ 144,000 (72,000)
Under/(Over) 7,200 134,200 185,800
Answer:
1. D 2. B 3. B 4. C
Problem 13
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, 2003, 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

2004……………………………………… P 71,600
2005……………………………………… 111,400
2006……………………………………… 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:
2004…………………………………….. P7, 800
2005…………………………………….. none
2006…………………………………….. 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, 2005, two machines were shipped to a customer on a C.O.D. basis. The
sale was not entered until April 5, 2005 when cash was received for P6,100. The
machines were not included in the inventory at March 31, 2005. (Title passed on March
30, 2005).
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.
30
Sales per books and warranty costs were:
Warranty of Expense for Sales Made in
Year Ended March 31 Sales 2004 2005 2006 Total
2004 P940, 000 P760 P760
2005 1, 010, 000 360 P1, 310 1, 670
2006 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:
2004…………………………………. P 4, 000
2005…………………………………. 4, 000
2006…………………………………. 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, 2005 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:
2004…………………………………. P 12, 000
2005…………………………………. 18, 000
2006…………………………………. 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
Estimated liability under warranties 12,417
Warranty expense 7,006
c. Warranty expense 12,417
d. Retained earnings 12,417
2. The total receivable from the bank representing dealers fund reserve as of March 31,
2006 is:
a. P 5,100 b. P 6,900 c. P 12,000 d. P 14,000
3. Sales in 2004 were (over) understated by

a. P 6,500 b. P (6,500) c. P 7,800 d. P (7,800)
4. Sales in 2006 were (over) understated by:

a. P 6,500 b. P (6,100) c. P (5,590) d. P (11,690)
31
5. The accrued Salaries Payable that should be set up on March 31, 2006 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, 2006 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, 2005 is
a. P 13,660 b. P 40,981 c. P 60,000 d. P 66,000
Solution
Adjusting entry:
b. Sales 5,590
Inventory 4,300
Cost of sales 4,300
c. Sales 6,100
Retained earnings - beg 6,100
d. Warranty expense 12,417
Estimated warranty payable 12,417
2004 940,000 – 7,800 = 932,200
2005 1,010,000 + 6,100 – 7,800 = 1,023,900
2006 1,795,000 – 5,590 – 6,100 = 1,783,310
Adjusted balance = 3,739,410
X ½ of 1% = .005
Total Warranty expense = 18,697
Less: Warranty paid = 6,280
Estimated warranty liability = 12,417
e. Fund reserve from the bank 14,000
Other income 14,000
f. OE: Delivery equipment 600,000
Notes payable 600,000
CE: Delivery equipment 409,808
Discount on NP 190,192
Notes payable 600,000
Adj: Discount on NP 190,192
Delivery equipment 190,192
Adj: Interest expense 40,981
Discount on NP 40,981
P409,808 x 10% = P 40,981
g. Retained earnings 18,000
Salaries 18,000
Salaries 10,000
Accrued salaries 10,000
Answer:
1. C 2. D 3. D 4. D 5. C 6. C 7. B
Problem 14
You are auditing the accounts of Keith Zandro Merchandising Corporation for the year ended
December 31, 2006. You discover that the adjustments made in the previous audit for the
year 2005 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, 2005. The
following adjustments were included in the 2005 audit report:
a. Invoices for merchandise purchased on credit in December 2005 were not entered on
the books until payment of P12,000 was made in January 2006. The merchandise was
not included in the December 31, 2005 inventory. The company uses a periodic
inventory system.
32
b. Invoices for merchandise received on credit in December 2005 were not recorded in the
accounts until payment was made in January 2006; the goods were included in the 2005
ending inventory, P18,000.
c. Allowance for doubtful accounts for 2005 was understated by P2,000 because bad debts
expense in 2005 was not recorded.
d. Selling expense for 2005, P5,000, was not recorded in the accounts until paid in 2006.
e. Accrued wages of P4,000 at December 31, 2005, were not recorded in the accounts until
paid in January 2006.
f. Prepaid insurance at December 31, 2005 was understated by P600 because this amount
was included in 2005 expense. The insurance policy expires on December 31, 2006.
g. Income tax expense of P2,400 for the last part of the year ended December 31, 2005,
was not recorded until paid in January 2006.
h. Depreciation of P9,000 was not recorded for 2005.
Questions:
Based on the information given, answer the following:
1. Net income of 2005 is overstated by

a. P 40,400 b. P 39,800 c. P 38,400 d. P 29,400
2. Net income of 2006 is understated by

a. P 40,800 b. P 39,800 c. P 28,800 d. P 27,800
3. Operating expenses of 2005 is understated by

a. P 21,800 b. P 21,800 c. P 20,600 d. P 19,400
4. Operating expense of 2006 is overstated by

a. P 21,800 b. P 10,800 c. P 9,000 d. P 8,400
5. Cost of sales of 2006 is

b. Understated by P18,000 d. Not affected with error
Solution
NET INCOME
2005 2006
A. Omission of purchases (12,000) 12,000
Omission of inventory 12,000 (12,000)
B. Omission of purchases (18,000) 18,000
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G (2,400) 2,400
H (9,000) _______
(39,800) 28,800
33
OPERATING EXPENSES
2005 2006
A
B.
C. (2,000)
D (5,000) 5,000
E (4,000) 4,000
F 600 (600)
G
H (9,000) _______
(19,400) 8,400
Answer:
1. B 2. C 3. D 4. D 5. A
Pro0blem 15
Tuburan Company was organized during 2002 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 2002; however, 2003 and 2004 produced significant
sales, but modest profits. During 2003, 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 2005 transactions, and the way in which the bookkeeper recorded or
explained them, are being discussed:
a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count).
Inventory of parts 17,000
Purchases 17,000
b. Depreciation – equipment (purchased at the beginning of 2004) cost, P80,000;

estimated useful life, 10 years; manufacturer’s recommended value at end of 5 years,
P10,000.
Equipment 7,000
c. Unpaid wages at year-end 2004, P3,000; 2005, 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, 2004.
Cash 9,000
Because this is the correct amount of interest each year
e. Contract to deliver six electronic devices, signed October 15, 2005, pending assembly,
P45,000.
Due from customers 45,000
Sales 45,000
f. Property taxes for 2005, billed in November 2005, payable without penalty up to
February 15, 2004, P9,000. Paid on February 14, 2006.
34
February 14, 2006:
Property taxes 9,000
Cash 9,000
g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the 30-
day credit period, on January 26, 2006.
January 26, 2006:

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, 2005 is

a. P 10,500 b. P 9,000 c. P 7,500 d. P 1,500
2. Interest payable at December 31, 2005 is

a. P 9,000 b. P 7,500 c. P 1,500 d. P 750
3. Inventory at December 31, 2005 is

a. P 64,000 c. P 30,000
b. P 47,000 d. Cannot be determined
4. Wages expense at December 31, 2005 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, 2005 is understated by

a. P 38,500 b. P 12,500 c. P 11,750 d. P 11,000
Solution
1. B
P 60,000 x 15% = P 9,000
2. C
P 60,000 x 15% x 2/12 = P 1,500
3. B Given in item A
4. C
Wages expense 3,000
5. A
Interest payable 1,500
Property taxes 9,000
Advertising 17,000
Total 38,500
35
Problem 16
Branzuela Corporation reported the following amounts of net income for the years ended
December 31, 2003, 2004 and 2005:
2003 P127,000
2004 150,000
2005 128,500
You are performing the audit for the year ended December 31, 2005. 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, 2004 P14,000 understated

December 31, 2005 P23,000 overstated
b. On December 29, 2005, 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
2003 P4,000
2004 5,000
2005 3,500
d. The company failed to record accrued office salaries as follows:
December 31, 2003 P10,000

December 31, 2004 14,000
e. On March 1, 2004, 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
f. On July 1, 2004, 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, 2005, 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, 2003?
a. P133,000 b. P121,000 c. P117,000 d. P113,000
36
a. P159,000 b. P160,000 b. P179,000 c. P187,000
a. P129,600 b. P131,600 c. P139,600 d. P142,600
4. What adjusting entry should be made on December 31, 2005 to correct the error
described in item B?
a. Accounts payable 15,000
Purchases 15,000
b. Purchases 15,000
c. Accounts payable 15,000
Cash 15,000
d. Accounts payable 15,000
5. The adjusting entry on December 31, 2004 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
Solution
2003 2004 2005
Unadjusted Net Income 127,000 150,000 128,500
A 14,000 (14,000)
(23,000)
B 15,000
C 4,000 (4,000)
5,000 (5,000)
3,500
D (10,000) 10,000
(14,000) 14,000
E 13,000
F 5,000 (2,000)
G 14,000
___________ ___________ (1,400)
Adjusted Net Income 121,000 179,000 129,600
Answer:
1. B 2. A 3. D 4. A 5. B
37

Accounting For Correction of Errors: Exercises

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CHAPTER 2 – Accounting for

2. An analysis of Palmes Corporation’s unadjusted prepaid expense account at December

 An opening balance at P6,000 for Palmes comprehensive insurance policy. Palmes

3. On October 1, 2006, a company sold services to a customer and accepted a note in

a. Deferred interest income 3,000

4. What is the purpose of the following entry?

a. To recognize supplies used, if purchases of supplies are recorded in supplies.

What amount should Colasissi report as prior period adjustments in 2006?

December 31, 2003 P56,000

Failed to accrue P50,000 interest expense

Year Prior period adjustment Net income

 Inventory at December 31, 2005-P40,000, understated

30. An owner’s withdrawal amounting to P20,000 was erroneously recorded as salaries

36.A return of merchandise amounting to P4,500 which was previously purchased on

Accounts payable 5,400

31. d 32. b 33. b 34. d 35. c 36. d

1. The entry to record the adjustment of item “a” is:

2. The entry to record the adjustment of item “c”:

4. Net income of 2006 is overstated by:

2004 2005 2006

The Retained Earnings account showed the following postings:

Date Item Debit Credit

2. Corrected net loss of 2005

3. Corrected net loss of 2006

4. Adjusted retained earnings at December 31, 2004

5. Adjusted retained earnings at December 31, 2005

6. Adjusted retained earnings at December 31, 2006

Additional adjusting data:

a. A physical count of supplies on hand on December 31, 2006, totaled P5,500.

g. A further review of depreciation calculations of prior year revealed that depreciation of

3. Prepaid insurance at year-end is:

5. Depreciation expense at year-end is:

2. The inventory on December 31, 2005, was understated by P25,920.

Interest expense 15,000

1. The adjusted 2005 net income is:

2. The adjusted 2006 net income is:

4. 2006 net income is:

5. The correcting entry in item “1” is:

4. Retained earnings 25,500

Current assets 700,000 Current liabilities 250,000

In the course of your audit, you discover the following situations:

1. Depreciation of P16,000 for 2006 on delivery vehicles was not recorded.

4. A collection of P28,000 on account from a customer received on December 31, 2006

6. During November 2006, a competitor company filed a patent-infringement suit against

8. At December 31, 2006, an analysis of payroll information shows accrued salaries of

2. Non-current assets at year-end is:

3. Current liabilities at year-end is:

4. Non-current liabilities at year-end is:

5. The net income of 2006 is understated by:

6. The total amount of fundamental error is:

7. Total Stockholders’ Equity at year-end is:

Liabilities and Stockholders’ Equity

1. The investment portfolio consists of short-term investment, classified as available-for-

3. Inventory at year-end is:

4. Cost of sales at year-end is:

5. Net income of the company is:

The net incomes reported on statements submitted to you were as follows:

Year ending 12/31

For year ended Dec. 31

a. Accrued expenses at end of year P 15,120 P 14,658 P 32,368

Goods in transit at end of year omitted from

e. Purchase for which the entry had been made

Other points requiring considerations: