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CHAPTER 2 – Accounting for
Correction of Errors
Exercises
- 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, b. P 10,200 P 3, c. P 10,200 P 3, d. P 10,200 P 3,
- 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,
- 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, Interest receivable 3, b. Interest income 3, Interest receivable 3, c. Interest receivable 3, Deferred interest income 3, d. Interest receivable 3, Interest income 3,
- 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.
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.
- On December 31, earned but unpaid wages amounted to P15,000. What reversing entry could be made on January 1? a. Wages expense 15, Wages payable 15, b. Prepaid expense 15, Wages expense 15, c. Wages expense 15, Prepaid wages 15, d. Wages payable 15, Wages expense 15,
- 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, Prepaid insurance 6, c. Prepaid insurance 5, Insurance expense 5, d. Insurance expense 500 Prepaid insurance 500
- 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 Consulting revenue xxx c. Unearned consulting rev. xxx Consulting revenue xxx d. Consulting revenue receivable xxx Unearned consulting revenue xxx
- 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, Rental income 2, c. Rental income 2, Unearned rental income 2, d. Unearned rental income 12, Rental income 12,
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,
- 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,
- 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.
- As a result of Yuri’s accounting treatment of the note, interest, and merchandise, which of the following items was reported correctly?
Retained earnings Interest payable a. Yes Yes b. No No c. Yes No d. No Yes
- 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, b. Understated by P 60,000 d. Correctly stated
- 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, December 31, 2005 51, December 31, 2006 64,
The entry on December 31, 2006 to correct for these omissions would include a a. Credit to wage expense for P64, b. Debit to wage expense for P51, c. Debit to wage expense for P13, d. Credit to retained earnings for P64,
- 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, Failed to amortize prepaid rent expense of P100, Failed to delay recognition of prepaid advertising expense of P60,
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,
- 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, Net income 150,000 200, Retained earnings, 12/31 P 850,000 P 700,
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, 2006 P (50,000) 180, b. 2005 (50,000) 150, 2006 - 180, c. 2005 (25,000) 125, 2006 - 180, d. 2005 - 125, 2006 - 180,
- The following information appeared on Blight Inc.’s December 31 financial statements: 2005 2006 Assets P 1,000,000 P1,200, Liabilities 750,000 800, Contributed capital 120,000 120, Dividends paid 100,000 60,
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,
- 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
- 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
- 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
- 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
- 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
- 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
- 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
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, Notes receivable 100, Interest Income 2,
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, Purchases 5,
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
- d 12. c 13. c 14. a 15. d 16. b 17. c 18. b 19. a 20. c
- b 22. b 23. c 24. a 25. b 26. c 27. b 28. c 29. b 30. d
- d 32. b 33. b 34. d 35. c 36. d_
- Net income of 2005 is overstated by: a. P 460,400 b. P 318,400 c. P 107,000 d. P 73,
- Net income of 2006 is overstated by: a. P 367,000 b. P 312,000 c. P 103,400 d. P 69,
Solution a. Accumulated depreciation 51, Depreciation expense (2006) 17, Retained earnings (2004 & 2005) 34, b. Retained earnings 90, Salaries expense 90, c. No adjustment d. No adjustment since no indication of impairment. e. Loss on obsolete inventory 174, Retained earnings 174, f. Salaries expense 6, Salaries payable 6, g. Prepaid insurance 4, Insurance expense 4,
2004 2005 2006 Item A 17,000 17,000 17, Item B (90,000) 90, Item C - - - Item D Item E (174,000) Item F (6,800) Item G ___________ __________ 4, 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, 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.
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, Dec 31 Net income for year 18, 2005 Jan 10 Dividends paid 15, Mar 6 Stock sold – excess over par 32, Dec31 Net loss for year 11, 2006 Jan 10 Dividend paid 15, Dec 31 Net loss for year 12,
Questions:
- Corrected net income of 2004 a. P 19,800 b. P 15,600 c. P 13,600 d. P 16,
- Corrected net loss of 2005 a. P 16,000 b. P 14,000 c. P 12,000 d. P 10,
- Corrected net loss of 2006 a. P 16,200 b. P 15,800 c. P 15,200 d. P 12,
- Adjusted retained earnings at December 31, 2004 a. P 109,200 b. P 106,400 c. P 94,600 d. P 85,
- Adjusted retained earnings at December 31, 2005 a. P 71,200 b. P 69,000 c. P 67,600 d. P 65,
- Adjusted retained earnings at December 31, 2006 a. P 51,400 b. P 49,800 c. P 49,000 d. P 48,
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,
- unrecorded purchases (3,800) 3, _(5,500) Item E (2,100) 2, (1,700) Item F 1,200 (1,200) ___________ __________ 2, Adjusted net income/loss 19,800 (12,000) (16,200) Retained earnings – beg. 81,000 94,600 67, Item A (15,000) (15,000) Item B – error in recording improv. 9,
- unrecorded depreciation (800) _________ ____________ Retained earnings - end 94,600 67,600 51, Answer:
- A 2. C 3. A 4. C 5. C 6. A_
Solution
1. Supplies expense 8, _Supplies on hand 8,
- Accrued salaries and wages 7,_ Salaries and wages expense 7, _To reverse accrued salaries. Salaries and wages expense 22, Accrued salaries and wages 22,
- Interest income 25,_ Interest receivable 25, _To reverse accrued income. Interest receivable 21, Interest income 21,
- Insurance expense 125,_ _Prepaid insurance 125,
- Retained earnings 70,_ _Rent income 70,
- Depreciation expense 225,_ _Accumulated depreciation 225,
- Retained earnings 36,_ _Accumulated depreciation 36, Answer:
- 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
- However, the accountant noted that the following errors had been made:
- 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.
- The inventory on December 31, 2005, was understated by P25,920.
- The bookkeeper in recording interest expense for both 2005 and 2006 on bonds payable made the following entry:
Interest expense 15, Cash 15,
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.)
- 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
- The adjusted 2005 net income is: a. P 422,120 b. P 419,120 c. P 192,920 d. P 189,
- The adjusted 2006 net income is: a. P 294,878 b. P 291,878 c. P 180,278 d. P 65,
3. 2005 net income is overstated by:
Int. paid Int. exp. Amort. Carrying
Item 2 25,920 (25,920)
Answer:
Questions
The correcting entry of item “3” assuming the company’s books were already closed is:
- a. P 232,200 b. P 229,200 c. P 113,080 d. P 3,
- a. Understated by P62, 4. 2006 net income is:
- b. Understated by P59,
- c. Overstated by P166,
- d. Overstated by P51,
- a. Accounts receivable 114, 5. The correcting entry in item “1” is: - Sales 114,
- b. Sales 114, - Accounts receivable 114,
- c. Retained earnings 114, - Sales 114,
- d. Sales 114, - Retained earnings 114,
- Retained earnings 114, Solution - Sales 114,
- Cost of sales (beg. inv) 25, - Retained earnings 25,
- Retained earnings 1,
- Interest expense 1, - Discount on bonds payable 3, - 235, Value
- 2002 15,000 16,450 1,450 236,
- 2003 15,000 16,552 1,552 238,
- Retained earnings 25,
- Repairs expense 30, - Equipment 55,
- Accumulated depreciation 5, - Retained earnings 2, - Depreciation expense 2,
- Accumulated depreciation 3, - Depreciation expense 3,
- Unadjusted net income 303,000 232,
- Item 1 (114,600) 114,
- Item 4 (25,500) (30, Item 3 (1,450) (1,552)
- error in recording depreciation 2,550 2, - __________ 3,
- Adjusted net income 189,920 294,
- a. P 776,000 b. P 695,000 c. P 691,000 d. P 678, 1. 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, 2. Non-current assets at year-end is:
- a. P 911,600 b. P 863,600 c. P 286,600 d. P 238, 3. Current liabilities at year-end is:
- a. P 1,561,600 b. P 1,525,000 c. P 1,513,600 d. P 900, 4. Non-current liabilities at year-end is:
- a. P 622,400 b. P 603,900 c. P 568,400 d. P 559, 5. The net income of 2006 is understated by:
- a. P 176,000 b. P 157,500 c. P 107,500 d. P 25, 6. The total amount of fundamental error is:
- a. P 2,329,900 b. P 2,229,900 c. P 2,227,400 d. P 2,099, 7. Total Stockholders’ Equity at year-end is:
- b. Retained earnings 42, a. No adjustment - Cost of sales 42,
- c. Cost of sales 42, - Retained earnings 42,
- d. Retained Earnings 42, - Inventory 42,
- Depreciation expense 16, Solution
- Accumulated depreciation 16,
- Cost of sales (beg. inv) 95,
- Cost of sales 42,
- Cash 28,
- Accumulated depreciation 110,
- Machinery 91,
- Gain on sale 18,
- Loss on damages 625,
- Estimated liability on damages 625,
- Unrealized holding loss 26,
- Market value – beg. 190,
- Market value – end 164,
- Unrealized holding loss 26,
- Salaries payable 48,
- Salaries expense 36, To reverse accrued salaries.
- Equipment 1,600,
- Depreciation expense 200,
- Accumulated depreciation 200,
10. Insurance expense 25, Prepaid insurance 37, _Retained earnings 62,
- 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, Marketable equity securities 125, Accounts Receivable 460, Allowance for doubtful accounts ( 55,000) Inventories 530, Property and equipment 620, Accumulated Depreciation ( 280,000) Total Assets 2,625,
Liabilities and Stockholders’ Equity Accounts payable and accrued liabilities 1,685, Income tax payable 110, Common stock, P20 par 300, Additional paid-in capital 75, Retained earnings 455, Total liabilities and stockholders’ equity 2,625,
Matias Corporation STATEMENT OF INCOME For the Year Ended December 31, 2006 Net Sales 1,700, Cost of sales 570, Gross Profit 1,130, Operating Expenses Selling and administrative 448, Depreciation 42, Income before income tax 640, Income tax expense 192, Net Income 448,
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:
- 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,
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/ 2004 2005 2006 Income, pretax P63,000 P 70,763 P 61,
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, b. Earned (uncollected) revenue at end of year 1, c. Prepaid expenses at end of year 6,314 8,470 9, d. Unearned revenue (collected in advance) at end of year 4,
Goods in transit at end of year omitted from inventory
e. Purchase for which the entry had been made (ownership passed) 18,270 21, f. Purchase for which the entry had not been made (ownership not passed) 11,970 13,
Other points requiring considerations:
g. On January 1, 2006, sold operational equipment for P31,500 that originally cost P35, 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
- Adjusted net income of 2004 is: a. P 85,834 b. P 82,334 c. P 52,094 d. P 39,
- Adjusted net income of 2005 is: a. P 81,669 b. P 81,081 c. P 80,157 d. P 76,
- Adjusted net income of 2006 is: a. P 86,502 b. P 56,682 c. P 51,082 d. P 42,
- Inventory at year-end is understated by: a. P 3,370 b. P 7,930 c. P 21,640 d. P 35,
- Accrued expenses at year-end is: a. Overstated by P17,710 c. Understated by P31, b. Understated by P32,368 d. Understated by P17,
Solution
2004 2005 2006 Unadjusted net income 63,000 70,763 61, Item A (15,120) 15, (14,658) 14, (32,368) Item B 1,400 (1,400) Item C 6,314 (6,314) 8,470 (8,470) 9, Item D (4,270) 4, Item E 18,270 (18,270) 21, Item F - - - Item G 3, Item H (3,500) (4,900) (5,600) Adjusted net income 52,094 81,081 51, 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, Net income, 2005 100, Net income, 2006 110, Balance, 12/31/06 P300,
From your examination, you obtained the following information which must be taken into consideration at the close of the year involved:
December 31, 2004
- Goods consigned out to consignees are included in the inventory at P120,000, which is 20 percent in excess of cost.
- Equipment with a 10-year-life was purchased for P30,000 and charged to expense on December 31.
- The following liabilities are omitted from the records: Materials included in inventory P 3, Accrued taxes 4,
