CHAPTER 2 Accounting for

Correction of Errors
Exercises
1. On November 1, 2006, Rosete Company paid P10,800 to renew its insurance policy or !
years. On "ecember !1, 2006, Rosete#s unad$usted trial valance s%owed a balance o
P2&0 or prepaid insurance and P1!,2!0 or insurance e'pense. (%at amounts s%ould
be reported or prepaid insurance and insurance e'pense in Rosete#s "ecember !1, 2006
inancial statements)
Prepaid Insurance Insurance Expense
a. P *,*00 P !,600
b. P 10,200 P !,600
c. P 10,200 P !,!00
d. P 10,200 P !,0!0
2. +n analysis o Palmes Corporation#s unad$usted prepaid e'pense account at "ecember
!1, 2006 revealed t%e ollowin,-
+n openin, balance at P6,000 or Palmes compre%ensive insurance policy. Palmes
%ad paid an annual premium o P12,000 on .uly 1, 200/.
+ P12,800 annual insurance premium payment made .uly 1, 2006.
+ P8,000 advance rental payment or a ware%ouse Palmes leased or 1 year
be,innin, .anuary 1, 2006.
0n its "ecember !1, 2006 balance s%eet, w%at amount s%ould Palmes report as prepaid
e'penses)
a. P 20,100 b. P 11,100 c. P 8,000 d. P 6,100
!. On October 1, 2006, a company sold services to a customer and accepted a note in
e'c%an,e wit% a P120,000 ace value and an interest rate o 102. 3%e note re4uires
t%at bot% t%e principal and interest be paid at t%e maturity date, "ecember 1, 200&.
3%e company#s accountin, period is t%e calendar year. (%at ad$ustin, entry 5related to
t%is note6 will be re4uired at "ecember !1, 2006 on t%e company#s boo7s)
a. "eerred interest income !,000
0nterest receivable !,000
b. 0nterest income !,000
0nterest receivable !,000
c. 0nterest receivable !,000
"eerred interest income !,000
d. 0nterest receivable !,000
0nterest income !,000
1. (%at is t%e purpose o t%e ollowin, entry)
8upplies ''''
8upplies e'pense ''''
a. 3o reco,ni9e supplies used, i purc%ases o supplies are recorded in supplies.
1

b. 3o reco,ni9e supplies on %and, i purc%ases o supplies are recorded in supplies
e'pense.
c. 3o record t%e purc%ase o supplies durin, or at t%e end o t%e period.
d. 3o close t%e e'pense account or supplies at t%e end o t%e period.
/. On "ecember !1, earned but unpaid wa,es amounted to P1/,000. (%at reversin, entry
could be made on .anuary 1)
a. (a,es e'pense 1/,000
(a,es payable 1/,000
b. Prepaid e'pense 1/,000
(a,es e'pense 1/,000
c. (a,es e'pense 1/,000
Prepaid wa,es 1/,000
d. (a,es payable 1/,000
(a,es e'pense 1/,000
6. + !:year insurance policy was purc%ased on October1 or P6,000, and prepaid insurance
was debited. +ssumin, a "ecember !1 year:end, w%at is t%e reversin, entry at t%e
be,innin, o t%e ne't period)
a. None is re4uired.
b. Cas% 6,000
Prepaid insurance 6,000
c. Prepaid insurance /,/00
0nsurance e'pense /,/00
d. 0nsurance e'pense /00
Prepaid insurance /00
&. + consultin, irm started and completed a pro$ect or a client in "ecember 2006. 3%e
pro$ect %as not been recorded on t%e consultin, irm#s boo7s, and t%e irm will not
receive payment rom t%e client until ;ebruary 200&. 3%e ad$ustin, entry t%at s%ould be
made on t%e boo7s o t%e consultin, irm on "ecember !1, 2006, t%e last day o t%e
irm#s iscal year, is
a. Cas% in transit '''
Consultin, revenue '''
b. Consultin, revenue receivable '''
Consultin, revenue '''
c. <nearned consultin, rev. '''
Consultin, revenue '''
d. Consultin, revenue receivable '''
<nearned consultin, revenue '''
8. Cristie Company sublet a portion o its ware%ouse or / years at an annual rental o
P1/,000, be,innin, on =arc% 1. 3%e tenant paid 1 year#s rent in advance, w%ic% Cristie
recorded as a credit to calendar:year basis. 3%e ad$ustment on "ecember !1 o t%e irst
year s%ould be
a. No >ntry.
b. <nearned rental income 2,/00
Rental income 2,/00
c. Rental income 2,/00
<nearned rental income 2,/00
d. <nearned rental income 12,/00
Rental income 12,/00
2

*. +ter a successul drive aimed at members o a speciic national association, Online
Company received a total o P180,000 or !:year subscriptions be,innin, +pril 1, 2006,
and recorded t%is amount in t%e unearned revenue account. +ssumin, Online records
ad$ustment only at t%e end o t%e calendar year, t%e ad$ustin, entry re4uired to relect
t%e proper balances in t%e accounts at "ecember !1, 2006 is to
a. "ebit subscription revenue or P1!/,000 and credit unearned revenue or P1!/,000.
b. "ebit unearned revenue or P1!/,000 and credit subscription revenue or P1!/,000.
c. "ebit subscription revenue or P1/,000 and credit unearned revenue or P1/,000.
d. "ebit unearned revenue or P1/,000 and credit subscription revenue or P1/,000.
10. .ay Corporation renewed an insurance policy or !:years be,innin, .uly 1, 2006 and
recorded t%e P81,000 premium in t%e prepaid insurance accounts. 3%e P81,000
premium represents an increase o P2!,100 rom t%e P/&,600 premium c%ar,ed ! years
a,o. +ssumin, .ay?# records its insurance ad$ustments only at t%e end o t%e calendar
year, t%e ad$ustin, entry re4uired to relect t%e proper balances in t%e insurance
accounts at "ecember !1, 2006, .ay#s year:end is to
a. "ebit insurance e'pense or P1!,/00 and credit prepaid insurance or P1!,/00.
b. "ebit prepaid insurance or P1!,/00 and credit insurance e'pense or P1!,/00.
c. "ebit insurance e'pense or P6&,/00 and credit prepaid insurance or P6&,/00.
d. "ebit insurance e'pense or P2!,100 and credit prepaid insurance or P2!,100.
11. 3%e 2006 inancial statements o @ers%ey Company reported net income or t%e year
ended "ecember !1, 2006 o 2 million. On .uly 1, 200&, subse4uent to t%e issuance o
t%e 2006 inancial statements, @ers%ey c%an,ed rom an accountin, principle t%at is not
,enerally accepted to one t%at is ,enerally accepted. 0 t%e ,enerally accepted
accountin, principle %ad been used in 2006, net income or t%e year ended "ecember
!1, 2006 would %ave been decreased by 1 million. On +u,ust 1, 200&, @ers%ey
discovered a mat%ematical error relatin, to its 2006 inancial statements. 0 t%is error
%ad been discovered in 2006, net income or t%e year ended would %ave been increased
by P/00,000.
(%at amount, i any, s%ould be included in net income or t%e year ended "ecember !1,
200& because o t%e items noted above)
a. P 0 c. P /00,000 increase
b. P /00,000 decrease d. P 1,000,000 decrease
12. >dcelle Company reported a retained earnin,s balance o P100,000 at "ecember !1,
200/. 0n +u,ust 2006, >dcelle determined t%at insurance premiums o P60,000 or t%e
!:year period be,innin, .anuary 1, 200/ %ad been paid and ully e'pensed in 200/.
>dcelle %as a !02 income ta' rate.
(%at amount s%ould >dcelle report as ad$usted be,innin, retained earnin,s in its 2006
statement o retained earnin,s)
a. P 112,000 b. P 110,000 c. P 128,000 d. P 120,000
1!. Colasissi Corporation ailed to accrue warranty costs o P/0,000 in its "ecember !1,
200/ inancial statements. 0n addition, a c%an,e rom strai,%t:line to accelerated
depreciation made at t%e be,innin, o 2006 resulted in a cumulative eect o P!0,000
on Colasissi#s retained earnin,s. Aot% t%e P/0,000 and P!0,000 are net o related
income ta'es.
(%at amount s%ould Colasissi report as prior period ad$ustments in 2006)
3

a. P 0 b. P !0,000 c. P /0,000 d. P 80,000
Buestions 11 and 1/ are based on t%e ollowin, inormation.
On October 1, 2006, Curi Retailers si,ned a 1:mont%, 162 note payable to inance t%e
purc%ase o %oliday merc%andise. +t t%at date, t%ere was no direct met%od o pricin, t%e
merc%andise, and t%e note#s mar7et rate o interest was 112. Curi recorded t%e
purc%ase at t%e note#s ace amount. +ll o t%e merc%andise was sold by "ecember 1,
2006. Curi#s 2006 inancial statements reported interest payable and interest e'pense
on t%e note or ! mont%s at 162. +ll amounts due on t%e note were paid ;ebruary 1,
200&.
11. Curi#s 2006 cost o ,oods sold or t%e %oliday merc%andise was
a. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October
1, 2006 present value.
b. Overstated by t%e dierence between t%e note#s ace amount and t%e note#s October
1, 2006 present value plus 112 interest or 2 mont%s.
c. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s
October 1, 2006 present value.
d. <nderstated by t%e dierence between t%e note#s ace amount and t%e note#s
October 1, 2006 present value plus 112 interest or 2 mont%s.
1/. +s a result o Curi#s accountin, treatment o t%e note, interest, and merc%andise, w%ic%
o t%e ollowin, items was reported correctly)
12/31/06 12/31/06
Retained earnings Interest payable
a. Ces Ces
b. No No
c. Ces No
d. No Ces
16. On "ecember !1, 2006, >'cel Corp. sold merc%andise or P&/,000 to ;ineale Co. 3%e
terms o t%e sale were net !0, ;OA s%ippin, point. 3%e merc%andise was s%ipped on
"ecember !1, 2006 and arrived at ;ineale on .anuary /, 200&. Aecause o a clerical
error, t%e sale was not recorded until .anuary 200&, and t%e merc%andise, sold at 2/2
mar7up, was included in >'cel#s inventory at "ecember !1, 2006.
+s a result, >'cel#s cost o ,oods sold or t%e year ended "ecember !1, 2006 was
a. <nderstated by P &/,000 c. <nderstated by P 1/,000
b. <nderstated by P 60,000 d. Correctly stated
1&. ;or t%e past ! years, Dreenwis% Co. %as ailed to accrue unpaid wa,es earned by
wor7ers durin, t%e last wee7 o t%e year. 3%e amounts omitted, w%ic% are considered
material, were as ollows-
"ecember !1, 200! P/6,000
"ecember !1, 200/ /1,000
"ecember !1, 2006 61,000
3%e entry on "ecember !1, 2006 to correct or t%ese omissions would include a
a. Credit to wa,e e'pense or P61,000
b. "ebit to wa,e e'pense or P/1,000
c. "ebit to wa,e e'pense or P1!,000
4

d. Credit to retained earnin,s or P61,000
18. +n audit o ;unny Co. or 2006, its irst year o operations, detected t%e ollowin, errors
made at "ecember !1, 2006-
;ailed to accrue P/0,000 interest e'pense
;ailed to record depreciation e'pense on oice e4uipment o P80,000
;ailed to amorti9e prepaid rent e'pense o P100,000
;ailed to delay reco,nition o prepaid advertisin, e'pense o P60,000
3%e net eect o t%ese errors was to overstate net income or 2006 by
a. P 1!0,000 b. P 1&0,000 c. P 2!0,000 d. P 2*0,000
1*. (%ile preparin, its 2006 inancial statements, ;alact Corp. discovered computational
errors in its 200/ and 2001 depreciation e'pense. 3%ese errors resulted in
overstatement o eac% year#s income by P2/,000, net o income ta'es. 3%e ollowin,
amounts were reported in t%e previously issued inancial statements-
2005 2004
Retained earnin,s, 1E1 P &00,000 P /00,000
Net income 1/0,000 200,000
Retained earnin,s, 12E!1 P 8/0,000 P &00,000
;alact#s 2006 net income is correctly reported at P180,000. (%ic% o t%e ollowin,
amounts s%ould be reported as prior:period ad$ustments and net income in ;alact#s
2006 and 200/ comparative inancial statements)
Year Prior period adust!ent "et inco!e
a. 200/ : P1/0,000
2006 P 5/0,0006 180,000
b. 200/ 5/0,0006 1/0,000
2006 : 180,000
c. 200/ 52/,0006 12/,000
2006 : 180,000
d. 200/ : 12/,000
2006 : 180,000
20. 3%e ollowin, inormation appeared on Ali,%t 0nc.#s "ecember !1 inancial statements-
2005 2006
+ssets P 1,000,000 P1,200,000
Fiabilities &/0,000 800,000
Contributed capital 120,000 120,000
"ividends paid 100,000 60,000
0n preparin, its 2006 inancial statements, Ali,%t discovered t%at it %ad misplaced a
decimal in calculatin, depreciation or 200/. 3%is error overstated 200/ depreciation by
P10,000. 0n addition, c%an,in, tec%nolo,y %ad si,niicantly s%ortened t%e useul lie o
Ali,%t#s computers. Aased on t%is inormation, Ali,%t determined t%at depreciation
s%ould be P!0,000 %i,%er in 2006 inancial statements.
+ssumin, t%at no correctin, or ad$ustin, entries %ave been made and i,norin, income
ta'es, %ow muc% s%ould Ali,%t report as 2006 net income)
a. P 2!0,000 b. P 210,000 c. P 180,000 d. P 1&0,000
5

Buestions 21 and 22 are based on t%e ollowin, inormation.
+n audit o +n,elina Company %as revealed t%e ollowin, our errors t%at %ave occurred
but %ave not been corrected-
0nventory at "ecember !1, 200/:P10,000, understated
0nventory at "ecember !1, 2006:P1/,000, overstated
"epreciation or 200/:P&,000, understated
+ccrued e'penses at "ecember !1, 2006:P10,000, understated
21. 3%e errors cause t%e reported net income or t%e year endin, "ecember !1, 2006 to be
a. Overstated by P&2,000 c. <nderstated by P28,000
b. Overstated by P6/,000 d. <nderstated by P1/,000
22. 3%e errors cause t%e reported retained earnin,s at "ecember !1, 2006 to be
a. Overstated by P6/,000 c. Overstated by P2/,000
b. Overstated by P!2,000 d. <nderstated by P18,000
2!. Collection o notes receivable o P/0,000 plus interest o P/00 was recorded as debit to
cas% o P/0,/00 and notes receivable o P/0,/00. 3%is error will
a. Overstate t%e e'penses by P/00
b. <nderstate t%e liability by P/00
c. <nderstate assets by P/00 and understate revenue by P/00
d. <nderstate revenue by P/00
21. +ccounts payable o P!2,000 was paid and erroneously recorded as debit to accounts
payable and credit to cas% or P2!,000. 3%e wor7in, capital
a. @as no eect c. 0s understated by P*,000
b. 0s overstated by P*,000 d. 0s understated by P2!,000
2/. 3%e be,innin, accumulated depreciation per record was P100,000. "urin, t%e year, t%e
irm sold one o its mac%ines recorded as ollows-
Cas% 2&0,000
+ccumulated depreciation : mac%ine !0,000
=ac%ine !00,000
0 t%e actual cas% proceeds is P!00,000, t%e correctin, entry would be-
a. Cas% !00,000
=ac%ine !00,000
b. Cas% !0,000
Dain on sale o mac%ine !0,000
c. +ccumulated depreciation : mac%ine !0,000
Dain on sale o mac%ine !0,000
d. Cas% !00,000
=ac%ine 2&0,000
Dain on sale o mac%ine !0,000
26. Aased on no. 2/, assume t%at t%e nominal accounts %ad been closed. 3%e eect o t%e
error to t%e accountin, elements, i not corrected, is
a. P!0,000 understatement o t%e net income.
b. P!0,000 understatement o asset and P!0,000 understatement o net income.
c. P!0,000 understatement o asset and P!0,000 understatement o owner#s e4uity.
6

d. P!0,000 understatement o asset and P!0,000 overstatement o owner#s e4uity.
2&. + cas% purc%ase o P/,200 was recorded as P2,/00. 3%e error %ad been discovered w%en
nominal accounts were already closed to income summary, but not yet closed to t%e
capital account. 3%e correctin, entry will re4uire a
a. P2,&00 debit to accounts receivable
b. P2,&00 debit to purc%ases
c. P2,&00 credit to purc%ases
d. P2,&00 credit to accounts payable
28. <nder t%e periodic inventory system, t%e endin, inventory o P6/,000 was erroneously
recorded as P/6,000. 3%e error %ad been discovered w%en all nominal and temporary
accounts were already closed to t%e real account. 3%e correctin, entry would re4uire a
a. "ebit to capital account c. Credit to cost o sale
b. "ebit to income summary account d. Credit to owner#s capital
2*. + sales discount o P/,000 was recorded as purc%ase discount. 3%e error %ad been
discovered w%en nominal accounts were still open. 3%e correctin, entry would re4uire a
a. P/,000 debit to purc%ase discount c. P/,000 credit to sales discount
b. P/,000 credit to purc%ase discount d. P/,000 credit to accounts payable
!0. +n owner#s wit%drawal amountin, to P20,000 was erroneously recorded as salaries
e'pense. 3%e error %ad been discovered w%en all temporary accounts were already
closed to t%e capital account. 3%e correctin, entry will re4uire a
a. P20,000 debit to owner#s capital c. P20,000 debit to salaries e'pense
b. P20,000 debit to owner#s drawin,s d. No correctin, entry is necessary
!1. + payment o P20,000 rent was recorded as a debit to rent income. 3%e error %ad been
discovered w%en nominal accounts were already closed. 3%e correctin, entry would
re4uire a
a. P20,000 debit to rent e'pense c. P10,000 credit to rent income
b. P20,000 debit to rent income d. No ad$ustment entry is necessary
!2.+ cas% collection o P/,000 rom customer#s open account was recorded as P/00. 3%e
error %ad been discovered w%en nominal accounts were still open. 3%e correctin, entry
would re4uire a
a. P1,/00 debit to accounts receivable c. P/00 credit to accounts
receivable
b. P1,/00 debit to cas% d. P/00 credit to cas%
!!. + sale o merc%andise on account o P!,200 was recorded as P2,!00. 3%e error %ad
been discovered w%en nominal accounts were already closed. 3%e correctin, would
re4uire a
a. P*00 debit to cas%. c. P*00 debit to sale
b. P*00 debit to accounts receivable d. P*00 credit to accounts receivable
!1. + collection o P/,000 notes receivable, plus P/00 interest income was recorded as debit
to cas% P/,/00 and credit to notes receivable P/,/00. 3%e error %ad been discovered
w%en nominal accounts were still open. 3%e correctin, entry would re4uire a
a. P/00 debit to cas%. c. P/00 credit to cas%
b. P/00 debit to accounts receivable d. P/00 credit to interest income
7

!/.3%e accrued interest on a 122, 60:day note o a customer dated "ecember 1, 2006 wit%
a ace value o P100,000 was not ta7en up as o "ecember !1, 2001. 3%e collection o
t%e note, w%ic% matured on .anuary !1, 200&, was recorded as
Cas% 102,000
Notes receivable 100,000
0nterest 0ncome 2,000
3%e error was discovered ater collection. 3%e correctin, entry would re4uire a
a. P2,000 debit to cas%.
b. P2,000 debit to accrued interest receivable
c. P1,000 debit to interest income
d. P2,000 credit to interest income
!6.+ return o merc%andise amountin, to P1,/00 w%ic% was previously purc%ased on
account was recorded as
+ccounts payable /,100
Purc%ases /,100
0 t%e error %ad been discovered w%en t%e nominal accounts were still open, t%e
correctin, entry would re4uire a
a. P*00 debit to purc%ase return
b. P*00 debit to accounts payable
c. P*00 credit to purc%ases
d. P*00 credit to accounts payable
#ns$er%
1& c 2& a 3' d 4' b 5& d 6& a (& b )& d *& d 10& d
11& d 12& c 13& c 14& a 15& d 16& b 1(& c 1)& b 1*& a 20& c
21& b 22& b 23& c 24& a 25& b 26& c 2(& b 2)& c 2*& b 30& d
31& d 32& b 33& b 34& d 35& c 36& d
8

Problem 1
3%e irst audit o t%e boo7s o Fu9on Company was made or t%e year ended "ecember !1,
2006. 0n e'aminin, t%e boo7s, t%e auditor ound t%at certain items %ad been overloo7ed or
incorrectly %andled in t%e last ! years. 3%ese items are-
a. +t t%e be,innin, o 2001, t%e company purc%ased a mac%ine or P1,020,000 5salva,e
value o P102,0006 t%at %ad a useul lie o 6 years. 3%e boo77eeper used strai,%t:line
depreciation, but ailed to deduct t%e salva,e value in computin, t%e depreciation base
or t%e ! years.
b. +t t%e end o 200/, t%e company ailed to accrue sales salaries o P*0,000.
c. + ta' lawsuit t%at involved t%e year 2001 was settled late in 2006. 0t was determined
t%at t%e company owed an additional P1&0,000 in ta'es related to 2001. 3%e company
did not record a liability in 2001 or 200/ because t%e possibility o loss was considered
remote, and c%ar,ed t%e P1&0,000 to a loss account in 2006.
d. Fu9on Company purc%ased anot%er company early in 2001 and recorded ,oodwill o
P*00,000. Fu9on %ad not amorti9ed ,oodwill because its value %ad not diminis%ed. 3%e
estimated economic lie o t%e ,oodwill is 20 years.
e. 0n 2006, t%e company wrote o P1&1,000 o inventory considered to be obsoleteG t%is
loss was c%ar,ed directly to Retained >arnin,s.
. Cear:end wa,es payable o P6,800 were not recorded because t%e boo77eeper t%ou,%
t%at Ht%ey were immaterial.I
,. 0nsurance or a 12:mont% period purc%ased on November 1 o t%is year was c%ar,ed to
insurance e'pense in t%e amount o P/,280 because Ht%e amount o t%e c%ec7 is about
t%e same every year.
+uestions
1. 3%e entry to record t%e ad$ustment o item HaI is-
a. +ccumulated depreciation !1,000
Retained earnin,s 1&,000
"epreciation e'pense 1&,000
b. +ccumulated depreciation /1,000
Retained earnin,s !1,000
"epreciation e'pense 1&,000
c. +ccumulated depreciation 1&,000
"epreciation e'pense 1&,000
d. +ccumulated depreciation 1&,000
Retained earnin,s 1&,000
2. 3%e entry to record t%e ad$ustment o item HcI-
a. No ad$ustment.
b. Retained earnin,s 1&0,000
>stimated liability 1&0,000
c. Foss on dama,es 1&0,000
>stimated liability 1&0,000
9

d. Foss on dama,es 1&0,000
Cas% 1&0,000
!. Net income o 200/ is overstated by-
a. P 160,100 b. P !18,100 c. P 10&,000 d. P &!,000
1. Net income o 2006 is overstated by-
a. P !6&,000 b. P !12,000 c. P 10!,100 d. P 6*,100
Solution
a& #ccu!ulated depreciation 51'000
,epreciation expense -2006. 1('000
Retained earnings -2004 / 2005. 34'000
b& Retained earnings *0'000
0alaries expense *0'000
c& "o adust!ent
d& "o adust!ent since no indication o1 i!pair!ent&
e& 2oss on obsolete in3entory 1(4'000
Retained earnings 1(4'000
1& 0alaries expense 6')00
0alaries payable 6')00
g& Prepaid insurance 4'400
Insurance expense 4'400
2004 2005 2006
Ite! # 1('000 1('000 1('000
Ite! 4 -*0'000. *0'000
Ite! 5 6 6 6
Ite! ,
Ite! E -1(4'000.
Ite! 7 -6')00.
Ite! 8 99999999999 9999999999 4'400
"et E11ect 1('000 -(3'000 -6*'400.
#ns$er%
1& 4 2& # 3& , 4& ,
Problem 2
+ CP+ is en,a,ed by t%e 8ony Corporation in 2006 to e'amine t%e boo7s and records and to
ma7e w%atever corrections are necessary. +n e'amination o t%e accounts discloses t%e
ollowin,-
a. "ividends %ad been declared on "ecember 1/ in 2001 and 200/ but %ad not been
entered in t%e boo7s until paid.
b. 0mprovements in buildin, and e4uipment o P*,600 %ad been debited to e'pense at t%e
end o +pril 200!. 0mprovements are estimated to %ave an 8:year lie. 3%e company
uses t%e strai,%t:line met%od in recordin, depreciation and computes depreciation to t%e
nearest mont%.
c. 3%e p%ysical inventory o merc%andise %ad been understated by P!,000 at t%e end o
2001 and by P1,!00 at t%e end o 200/.
d. 3%e merc%andise inventories at t%e end o 200/ and 2006 did not include merc%andise
t%at was t%en in transit and to w%ic% t%e company %ad title. 3%is s%ipments o P!,800
and P/,/00 were recorded as purc%ases in .anuary o 2006 and 2001, respectively.
e. 3%e company %ad ailed to record sales commissions payable o P2,100 and P1,&00 at
t%e end o 200/ and 2006, respectively.
10

. 3%e company %ad ailed to reco,ni9ed supplies on %and o P1,200 and P2,/00 at t%e end
o 200/ and 2006, respectively.
3%e Retained >arnin,s account s%owed t%e ollowin, postin,s-
"ate 0tem "ebit Credit
2001 .an 1 Aalance 81,000
"ec !1 Net income or year 18,000
200/ .an 10 "ividends paid 1/,000
=ar 6 8toc7 sold J e'cess
over par !2,000
"ec!1 Net loss or year 11,200
2006 .an 10 "ividend paid 1/,000
"ec !1 Net loss or year 12,100
+uestions%
1. Corrected net income o 2001
a. P 1*,800 b. P 1/,600 c. P 1!,600 d. P 16,800
2. Corrected net loss o 200/
a. P 16,000 b. P 11,000 c. P 12,000 d. P 10,000
!. Corrected net loss o 2006
a. P 16,200 b. P 1/,800 c. P 1/,200 d. P 12,800
1. +d$usted retained earnin,s at "ecember !1, 2001
a. P 10*,200 b. P 106,100 c. P *1,600 d. P 8/,000
/. +d$usted retained earnin,s at "ecember !1, 200/
a. P &1,200 b. P 6*,000 c. P 6&,600 d. P 6/,000
6. +d$usted retained earnin,s at "ecember !1, 2006
a. P /1,100 b. P 1*,800 c. P 1*,000 d. P 18,200
Solution
2004 2005 2006
:nadusted "et inco!e/2oss 1)'000 -11'200. -12'400.
Ite! 4 -1'200. -1'200. -1'200.
Ite! 5 3'000 -3'000.
4'300 -4'300.
Ite! , ; unrecorded ending in3& 3')00 -3')00.
5'500
6 unrecorded purc<ases -3')00. 3')00
-5'500.
Ite! E -2'100. 2'100
-1'(00.
Ite! 7 1'200 -1'200.
99999999999 9999999999 2'500
#dusted net inco!e/loss 1*')00 -12'000. -16'200.
Retained earnings ; beg& )1'000 *4'600 6('600
Ite! # -15'000. -15'000.
Ite! 4 ; error in recording i!pro3& *'600
6 unrecorded depreciation -)00. 999999999 999999999999
Retained earnings 6 end *4'600 6('600 51'400
#ns$er%
1& # 2& 5 3& # 4& 5 5& 5 6& #
11

Problem 3
+ partial trial balance o .os% +le$andro Corporation is as ollows on "ecember !1, 2006-
"r. KKKK KKKKCr.KKKK
8upplies on %and P 1!,/00
+ccrued salaries and wa,es P &,/00
0nterest receivable on investments 2/,/00
Prepaid insurance 1/0,000
<nearned rent :0:
+ccrued interest payable &/,000
+dditional ad$ustin, data-
a. + p%ysical count o supplies on %and on "ecember !1, 2006, totaled P/,/00.
b. 3%rou,% oversi,%t, t%e +ccrued 8alaries and (a,es account was not c%an,ed durin,
2006. +ccrued salaries and wa,es on 12E!1E06 amounted to P22,000.
c. 3%e interest receivable on investments account was also let unc%an,ed durin, 2006.
+ccrued interest on investments amounts to P21,&/0 on 12E!1E06.
d. 3%e une'pired portions o t%e insurance policies totaled P!2/,000 as o "ecember
!1, 2006.
e. P110,000 was received on .anuary 1, 200/, or t%e rent o a buildin, or bot% 200/
and 2006. 3%e entire amount was credited to rental income.
. "epreciation or t%e year was erroneously recorded as P2/,000 rat%er t%an t%e
correct i,ure o P2/0,000.
,. + urt%er review o depreciation calculations o prior year revealed t%at depreciation
o P!6,000 was not recorded. 0t was decided t%at t%is oversi,%t s%ould be corrected by a
prior period ad$ustment.
+uestions
1. 3%e accrued salaries and wa,es at year:end is-
a. P 2*,/00 b. P22,000 c. P 11,/00 d. P &,/00
2. @ow muc% is t%e ad$usted salaries and wa,es at year:end assumin, t%at t%e balance o
t%is account in t%e boo7 is P!/0,000)
a. P !&*,/00 b. P !&2,000 c. P !61,/00 d. P !12,/00
!. Prepaid insurance at year:end is-
a. P 1/0,000 b. P !2/,000 c. P 12/,000 d. P 0
1. 8upplies on %and at year:end is-
a. P 1!,/00 b. P 8,000 c. P /,/00 d. P 2,/00
/. "epreciation e'pense at year:end is-
a. <nderstated by P22/,000
b. Overstated by P22/,000
c. <nderstated by P261,000
d. Overstated by P261,000
12

Solution
1& 0upplies expense )'000
0upplies on <and )'000
2& #ccrued salaries and $ages ('500
0alaries and $ages expense ('500
=o re3erse accrued salaries&
0alaries and $ages expense 22'000
#ccrued salaries and $ages 22'000
3& Interest inco!e 25'500
Interest recei3able 25'500
=o re3erse accrued inco!e&
Interest recei3able 21'(50
Interest inco!e 21'(50
4& Insurance expense 125'000
Prepaid insurance 125'000
5& Retained earnings (0'000
Rent inco!e (0'000
6& ,epreciation expense 225'000
#ccu!ulated depreciation 225'000
(& Retained earnings 36'000
#ccu!ulated depreciation 36'000
#ns$er%
1& 4 2& 5 3& 4 4& 5 5& #
Problem 4
3%e beore ta' income or ;ran9ine Dome9 Co. or 200/ was P!0!,000 and P2!2,200 or
2006. @owever, t%e accountant noted t%at t%e ollowin, errors %ad been made-
1. 8ales or 200/ included amounts o P111,600 w%ic% was received in cas% durin, 200/,
but or w%ic% t%e related products were delivered in 2006. 3itle did not pass to t%e
purc%aser until 2006.
2. 3%e inventory on "ecember !1, 200/, was understated by P2/,*20.
!. 3%e boo77eeper in recordin, interest e'pense or bot% 200/ and 2006 on bonds payable
made t%e ollowin, entry-
0nterest e'pense 1/,000
Cas% 1/,000
3%e bonds %ave a ace value o P2/0,000 and pay a stated interest rate o 62. 3%ey
were issued at a discount o P1/,000 on .anuary 1, 200/, to yield an eective interest o
&2. 5+ssume t%at t%e eective yield met%od s%ould be used.6
1. Ordinary repairs to e4uipment %ad been erroneously c%ar,ed to t%e >4uipment account
durin, 200/ and 2006 or P2/,/00 and P!0,000, respectively. 3%e company applies a
rate o 102 to t%e balance in t%e e4uipment account at t%e end o t%e year in its
determination o depreciation c%ar,es.
+uestions
1. 3%e ad$usted 200/ net income is-
a. P 122,120 b. P 11*,120 c. P 1*2,*20 d. P 18*,*20
2. 3%e ad$usted 2006 net income is-
13

a. P 2*1,8&8 b. P 2*1,8&8 c. P 180,2&8 d. P 6/,6&8
!. 200/ net income is overstated by-
a. P 2!2,200 b. P 22*,200 c. P 11!,080 d. P !,000
1. 2006 net income is-
a. <nderstated by P62,6&8
b. <nderstated by P/*,6&8
c. Overstated by P166,/22
d. Overstated by P/1,*22
/. 3%e correctin, entry in item H1I is-
a. +ccounts receivable 111,600
8ales 111,600
b. 8ales 111,600
+ccounts receivable 111,600
c. Retained earnin,s 111,600
8ales 111,600
d. 8ales 111,600
Retained earnin,s 111,600
Solution
1& Retained earnings 114'600
0ales 114'600
2& 5ost o1 sales -beg& in3. 25'*20
Retained earnings 25'*20
3& Retained earnings 1'450
Interest expense 1'552
,iscount on bonds payable 3'002
Int& paid Int& exp& #!ort& 5arrying
>alue
235'000
2002 15'000 16'450 1'450 236'450
2003 15'000 16'552 1'552 23)'002
4& Retained earnings 25'500
Repairs expense 30'000
E?uip!ent 55'500
#ccu!ulated depreciation 5'100
Retained earnings 2'550
,epreciation expense 2'550
#ccu!ulated depreciation 3'000
,epreciation expense 3'000
2002 2003
:nadusted net inco!e 303'000 232'200
Ite! 1 -114'600. 114'600
Ite! 2 25'*20 -25'*20.
Ite! 3 -1'450. -1'552.
Ite! 4 -25'500. -30'000
6 error in recording depreciation 2'550 2'550
9999999999 3'000
#dusted net inco!e 1)*'*20 2*4')()
#ns$er%
1& , 2& # 3& 5 4& # 5& 5
14

Problem 5
Cou %ave been assi,ned to e'amine t%e inancial statements o =acelle Company or t%e
year ended "ecember !1, 2006. Aelow is t%e Aalance 8%eet o t%e company.
Current assets &00,000 Current liabilities 2/0,000
Non:current assets 2,000,000 Non:current liabilities*00,000
KKKKKKKKK 8toc7%olders# >4uity 1,//0,000
3otal +ssets 2,&00,000 3otal liabilitiesE8@> 2,&00,000
0n t%e course o your audit, you discover t%e ollowin, situations-
1. "epreciation o P16,000 or 2006 on delivery ve%icles was not recorded.
2. 3%e p%ysical inventory count on "ecember !1, 200/, improperly e'cluded merc%andise
costin, P*/,000 t%at %ad been temporarily stored in a public ware%ouse. =acelle uses
periodic inventory system.
!. 3%e p%ysical inventory count on "ecember !1, 2006, improperly included merc%andise
wit% a cost o P12,/00 t%at %ad been recorded as a sale on "ecember 2&, 2006.
1. + collection o P28,000 on account rom a customer received on "ecember !1, 2006
was not recorded until .anuary 2, 200&.
/. 0n 2006, t%e company sold or P18,/00 ully depreciated e4uipment t%at ori,inally cost
P110,000. 3%e company credited t%e proceeds rom t%e sale to t%e >4uipment account.
6. "urin, November 2006, a competitor company iled a patent:inrin,ement suit a,ainst
=acelle claimin, dama,es o P1,100,000. 3%e company#s le,al counsel %as indicated
t%at an unavorable verdict is probable and a reasonable estimate o t%e court#s award
to t%e competitor is P62/,000. 3%e company %as not relected or disclosed t%is situation
in t%e inancial statements.
&. =acelle %as a portolio o tradin, securities. No entry %as been made to ad$ust to
mar7et. 0normation on cost and mar7et value is as ollows-
CO83 =+RL>3
"ecember !1, 200/ P 1*0,000 P 1*0,000
"ecember !1, 2006 168,000 161,000
8. +t "ecember !1, 2006, an analysis o payroll inormation s%ows accrued salaries o
P!6,600. 3%e +ccrued 8alaries payable account %ad a balance o P18,000 at "ecember
!1, 2006, w%ic% was unc%an,ed rom its balance at "ecember !1, 200/.
*. + lar,e piece o e4uipment was purc%ased on .anuary !, 2006, or P1,600,000 and was
c%ar,ed to Repairs >'pense. 3%e e4uipment is estimated to %ave a service lie o 8 years
and no residual value. =acelle normally uses t%e strai,%t J line depreciation met%od or
t%is type o e4uipment.
10. + P&/,000 insurance premium paid on .uly 1, 200/, or a policy t%at e'pires on .une !0,
200*, was c%ar,ed to insurance e'pense.
15

11. + trademar7 was ac4uired at t%e be,innin, o 200/ or P2/0,000. No amorti9ation %as
been recorded since its ac4uisition. 3rademar7 %as an economic lie o / years.
+uestions
1. Current assets at year:end is-
a. P &&6,000 b. P 6*/,000 c. P 6*1,000 d. P 6&8,/00
2. Non:current assets at year:end is-
a. P !,1*8,/00 b. P !,102,/00 c. P !,!02,/00 d. P !,2*8,/00
!. Current liabilities at year:end is-
a. P *11,600 b. P 86!,600 c. P 286,600 d. P 2!8,600
1. Non:current liabilities at year:end is-
a. P 1,/61,600 b. P 1,/2/,000 c. P 1,/1!,600 d. P *00,000
/. 3%e net income o 2006 is understated by-
a. P 622,100 b. P 60!,*00 c. P /68,100 d. P //*,*00
6. 3%e total amount o undamental error is-
a. P 1&6,000 b. P 1/&,/00 c. P 10&,/00 d. P 2/,000
&. 3otal 8toc7%olders# >4uity at year:end is-
a. P 2,!2*,*00 b. P 2,22*,*00 c. P 2,22&,100 d. P 2,0**,100
8. 3%e correctin, entry o item H!I assumin, t%e company#s boo7s were already closed is-
a. No ad$ustment
b. Retained earnin,s 12,/00
Cost o sales 12,/00
c. Cost o sales 12,/00
Retained earnin,s 12,/00
d. Retained >arnin,s 12,/00
0nventory 12,/00
Solution
1& ,epreciation expense 16'000
#ccu!ulated depreciation 16'000
2& 5ost o1 sales -beg& in3. *5'000
Retained earnings *5'000
3& 5ost o1 sales 42'500
In3entory 42'500
4& 5as< 2)'000
#ccounts recei3able 2)'000
5& #ccu!ulated depreciation 110'000
@ac<inery *1'500
8ain on sale 1)'500
6& 2oss on da!ages 625'000
Esti!ated liability on da!ages 625'000
(& :nrealiAed <olding loss 26'000
>aluation allo$ance 26'000
@arBet 3alue ; beg& 1*0'000
@arBet 3alue ; end 164'000
:nrealiAed <olding loss 26'000
)& 0alaries payable 4)'000
0alaries expense 4)'000
=o re3erse accrued salaries&
0alaries expense 36'600
0alaries payable 36'600
*& E?uip!ent 1'600'000
16

Repairs expense 1'600'000
,epreciation expense 200'000
#ccu!ulated depreciation 200'000
10& Insurance expense 25'000
Prepaid insurance 3('500
Retained earnings 62'500
11& "o a!ortiAation since no in1or!ation about its i!pair!ent&
#ns$er%
1& 5 2& 4 3& 4 4& , 5& 4 6& # (& # )& ,
Problem 6
=atias Corporation re4uires audited inancial statements or credit purposes. +ter ma7in,
normal ad$ustin, entries, but beore closin, t%e accountin, records or t%e year ended
"ecember !1, 2006. =atias#s controller prepared t%e ollowin, inancial statements or
2006-
=atias Corporation
83+3>=>N3 O; ;0N+NC0+F PO8030ON
,ece!ber 31' 2006
#ssets
Cas% 1,22/,000
=ar7etable e4uity securities 12/,000
+ccounts Receivable 160,000
+llowance or doubtul accounts 5 //,0006
0nventories /!0,000
Property and e4uipment 620,000
+ccumulated "epreciation 5 280,0006
3otal +ssets 2,62/,000
2iabilities and 0tocB<oldersC E?uity
+ccounts payable and accrued liabilities 1,68/,000
0ncome ta' payable 110,000
Common stoc7, P20 par !00,000
+dditional paid:in capital &/,000
Retained earnin,s 1//,000
3otal liabilities and stoc7%olders# e4uity 2,62/,000
=atias Corporation
83+3>=>N3 O; 0NCO=>
7or t<e Year Ended ,ece!ber 31' 2006
Net 8ales 1,&00,000
Cost o sales /&0,000
Dross Proit 1,1!0,000
Operatin, >'penses
8ellin, and administrative 118,000
"epreciation 12,000
0ncome beore income ta' 610,000
0ncome ta' e'pense 1*2,000
Net 0ncome 118,000
=atias#s ta' rate or all items was !02 or all aected years, and it made estimated ta'
payments w%en due. =atias %as been proitable in t%e past and e'pects results in t%e uture
to be similar to 2006. "urin, t%e course o t%e audit, t%e ollowin, additional inormation
5not considered w%en t%e above statements were prepared6 was obtained-
17

1. 3%e investment portolio consists o s%ort:term investment, classiied as available:or:
sale, or w%ic% total mar7et value e4ualed cost at "ecember !1, 200/. On ;ebruary 2,
2006, =atias sold one investment wit% a carryin, value o P100,000 or P1!0,000. 3%e
total o t%e sale proceeds was credited to t%e investment account.
2. +t "ecember !1, 2006, t%e mar7et value o t%e remainin, securities in t%e portolio was
P112,000.
!. 3%e P/!0,000 inventory total, w%ic% was based on a p%ysical count at "ecember !1,
2006, was priced at cost. 8ubse4uently, it was determined t%at t%e inventory cost was
overstated by P66,000. +t "ecember !1, 2006, t%e inventory#s mar7et value
appro'imated t%e ad$usted cost.
1. Pollution control devices costin, P18,000, w%ic% is %i,% in relation to t%e cost o t%e
ori,inal e4uipment, were installed on "ecember 2*, 200/, and were c%ar,ed to repairs in
200/.
/. 3%e ori,inal e4uipment reerred to in 0tem 1, w%ic% %ad a remainin, useul lie o si'
years on "ecember 20, 200/, is bein, depreciated by t%e strai,%t:line met%od or bot%
inancial and ta' reportin,.
6. + lawsuit was iled a,ainst =atias Corporation in October 2006 claimin, dama,es o
P2/0,000. Company#s le,al counsel believes t%at an unavorable outcome is probable,
and a reasonable estimate o t%e court#s award to t%e plainti is P60,000, w%ic% will be
paid in 200& i t%e case is settled.
+uestions
1. =ar7etable >4uity 8ecurities at year:end is-
a. P 1//,000 b. P 12/,000 c. P */,000 d. P 82,000
2. +llowance or mar7et decline in value o mar7etable e4uity security at year:end is-
a. P 0 b. P 8,000 c. P 10,000 d. P 1!,000
!. 0nventory at year:end is-
a. P 161,000 b. P /12,000 c. P /!0,000 d. P /*6,000
1. Cost o sales at year:end is-
a. P 6!6,000 b. P /&0,000 c. P //0,000 d. P /01,000
/. Net income o t%e company is-
a. P !**,&00 b. P !&*,000 c. P !66,100 d. P !!1,000
Solution
1& @arBetable e?uity securities 30'000
8ain on sale 30'000
2& 2oss on !arBet decline 13'000
#llo$ance 1or !arBet decline 13'000
3& 5ost o1 sales 66'000
In3entory 66'000
4& E?uip!ent 4)'000
Retained earnings 4)'000
5& ,epreciation )'000
#ccu!ulated depreciation )'000
6& 2oss on da!ages 60'000
Esti!ated liability on da!ages 60'000
#ns$er%
18

1& # 2& , 3& # 4& # 5& 5
Problem 7
Fon, establis%ed a retail business in 2001. >arly in 200&, Fon, entered into ne,otiations
wit% 8%ort wit% t%e intent to orm a partners%ip. Cou %ave been as7ed by Fon, and 8%ort
to c%ec7 Fon,#s boo7s or t%e past t%ree years to %elp 8%ort evaluate t%e earnin,s potential
o t%e business.
3%e net incomes reported on statements submitted to you were as ollows-
Cear endin, 12E!1
2001 200/ 2006
0ncome, preta' P6!,000 P &0,&6! P 61,880
"urin, t%e e'amination o t%e accounts, you ound t%e data ,iven below-
;or year ended "ec. !1
2001 200/ 2006
Omission rom t%e boo7s
a. +ccrued e'penses at end o year P 1/,120 P 11,6/8 P !2,!68
b. >arned 5uncollected6 revenue at end
o year 1,100
c. Prepaid e'penses at end o year 6,!11 8,1&0 *,812
d. <nearned revenue 5collected in advance6
at end o year 1,2&0
Doods in transit at end o year omitted rom
inventory
e. Purc%ase or w%ic% t%e entry %ad been made
5owners%ip passed6 18,2&0 21,610
. Purc%ase or w%ic% t%e entry %ad not been made
5owners%ip not passed6 11,*&0 1!,&10
Ot%er points re4uirin, considerations-
,. On .anuary 1, 2006, sold operational e4uipment or P!1,/00 t%at ori,inally cost P!/,000
on .anuary 1, 2001. Cas% was debited or P!1,/00 and e4uipment was credited or
P!1,/00. 3%e asset sold was depreciated in 2001 and 200/ but not on t%e 2006 on t%e
basis o a 10:year lie and no residual value.
%. No allowance or bad debts %as been set up. +n analysis o accounts receivable as o
"ecember !1, 2006, indicates t%at t%e allowance account s%ould %ave a balance o
P11,000, o w%ic% P!,/00 relates to 2001, P1,*00 to 200/, and P/,600 to 2006.
+uestions
1. +d$usted net income o 2001 is-
a. P 8/,8!1 b. P 82,!!1 c. P /2,0*1 d. P !*,166
2. +d$usted net income o 200/ is-
a. P 81,66* b. P 81,081 c. P 80,1/& d. P &6,&6*
19

!. +d$usted net income o 2006 is-
a. P 86,/02 b. P /6,682 c. P /1,082 d. P 12,682
1. 0nventory at year:end is understated by-
a. P !,!&0 b. P &,*!0 c. P 21,610 d. P !/,!/0
/. +ccrued e'penses at year:end is-
a. Overstated by P1&,&10 c. <nderstated by P!1,*08
b. <nderstated by P!2,!68 d. <nderstated by P1&,&10
Solution
2004 2005 2006
:nadusted net inco!e 63'000 (0'(63 61'))0
Ite! # -15'120. 15'120
-14'65). 14'65)
-32'36).
Ite! 4 1'400 -1'400.
Ite! 5 6'314 -6'314.
)'4(0 -)'4(0.
*')42
Ite! , -4'2(0. 4'2(0
Ite! E 1)'2(0 -1)'2(0.
21'640
Ite! 7 6 6 6
Ite! 8 3'500
Ite! D -3'500. -4'*00. -5'600.
#dusted net inco!e 52'0*4 )1'0)1 51'0)2
#ns$er%
1& 5 2& 4 3& 5 4& 5 5& 4
Problem 8
M0FF+ FC"0+ CO. 3%e records o t%e Company %ave not been e'amined or t%e t%ree:year
period ended "ecember !1, 2006. +s a result o your audit o t%e records or t%e year
ended "ecember !1, 2006 and your review o t%e records o t%e two prior years, it is
necessary to revise t%e net income and t%e retained income based upon t%e audited data,
w%ic% ollows-
3%e company#s retained income at "ecember !1, 2006 ollows-
Aalance, 12E!1E01 P *0,000
Net income, 200/ 100,000
Net income, 2006 110,000
Aalance, 12E!1E06 P!00,000
;rom your e'amination, you obtained t%e ollowin, inormation w%ic% must be ta7en into
consideration at t%e close o t%e year involved-
"ecember !1, 2001
1. Doods consi,ned out to consi,nees are included in t%e inventory at
P120,000, w%ic% is 20 percent in e'cess o cost.
2. >4uipment wit% a 10:year:lie was purc%ased or P!0,000 and c%ar,ed to
e'pense on "ecember !1.
!. 3%e ollowin, liabilities are omitted rom t%e records-
=aterials included in inventory P !,000
+ccrued ta'es 1,100
20

"ecember !1, 200/
1. <ncollectible accounts receivable o P*,000 are to be written o.
/. =ar7etable 8ecurities costin, P1/,000 were at a mar7et value o only
P*,000.
6. Dain o P!,000 on sale o ully depreciated e4uipment was credited to t%e
allowance or depreciation.
&. Fand cost o P*,000 %ad been erroneously c%ar,ed to e'pense.
8. 3%e inventory is overstated by P11,!00 because o an error in ootin, an
inventory price s%eet.
*. "epreciation was omittedG P/,000 s%ould be provided.
"ecember !1, 2006
10. 3%e ollowin, liabilities are omitted rom t%e records-
;or purc%ases o new mac%inery on "ecember !1, 2006 P12,000
+ccrued ta'es /,*00
+uestions
1. +d$usted net income o 200/ is-
a. P 11*,100 b. P 110,800 c. P 102,600 d. P *0,800
2. +d$usted net income o 2006 is-
a. P 8*,800 b. P *8,600 c. P 11/,100 d. P 11/,100
!. +d$usted retained earnin,s o 2001 is-
a. P 112,*00 b. P 10*,*00 c. P *2,*00 d. P 8*,*00
1. +d$usted retained earnin,s o 200/ is-
a. P 180,&00 b. P 20!,&00 c. P 212,/00 d. P 212,!00
/. +d$usted retained earnin,s o 2006 is-
a. P 116,200 b. P 116,000 c. P !1*,100 d. P 2*6,100
6 3%e entry to correct inormation Hnumber !I at "ecember !1, 2006 is-
a. Retained earnin,s 1,100
+ccrued ta'es 1,100
b. Cost o sales !,000
+ccounts payable !,000
c. Retained earnin,s 1,100
Cost o sales !,000
+ccrued ta'es 1,100
+ccounts payable !,000
d. No ad$ustin, entry is necessary.
*. 3%e entry to correct inormation Hnumber 1I at "ecember !1, 2006 is-
a. +llowance or bad debts *,000
+ccounts receivable *,000
b. Retained earnin,s *,000
+ccounts receivable *,000
c. Retained earnin,s *,000
+llowance or bad debts *,000
21

d. No ad$ustin, entry is necessary
8. +d$usted net income o 2001 5assumin, P8/,000 is recorded as net income o 20016 is-
a. P 116,*00 b. P 11/,000 c. P 10&,*00 d. P 8&,*00
Solution
1& "o adust!ent since t<e 2004 1inancial state!ent $as not a11ected&
2& E?uip!ent 30'000
Retained earnings 30'000
Retained earnings 3'000
,epreciation expense 3'000
#ccu!ulated depreciation 6'000
3& "o adust!ent since t<e 2004 1inancial state!ent $as not a11ected&
4& #llo$ance 1or bad debts *'000
#ccounts recei3able *'000
5& Retained earnings 6'000
#llo$ance 1or !arBet decline 6'000
6& #ccu!ulated depreciation 3'000
Retained earnings 3'000
(& 2and *'000
Retained earnings *'000
)& Retained earnings 14'300
5ost o1 sales 14'300
*& Retained earnings 5'000
#ccu!ulated depreciation 5'000
10& @ac<inery 12'000
#ccounts payable ; ot<ers 12'000
=axes 5'*00
#ccrued taxes 5'*00
2004 2005 2006
:nadusted net inco!e 100'000 110'000
Ite! 1 -20'000. 20'000
Ite! 2 30'000 -3'000. -3'000.
Ite! 3 -3'000. 3'000
-4'100. 4'100
Ite! 4 6 6 6
Ite! 5 -6'000.
Ite! 6 3'000
Ite! ( *'000
Ite! ) -14'300. 14'300
Ite! * -5'000.
Ite! 10 999999999 999999999 -5'*00.
#dusted net inco!e 110')00 115'400
Retained earnings 6 beg *0'000 203'(00
#dust!ents%
Ite! 1 -20'000.
Ite! 2 30'000
Ite! 3 -3'000.
-4'100. 999999999
Retained earnings 6 end 203'(00 31*'100
#ns$er%
1& 4 2& 5 3& 5 4& 4 5& 5 6& , (& # )& ,
Problem 9
3%e Corporation prepared its own income statement or t%e years 200/ and 2006. 3%e
President was not satisied and decided to en,a,e t%e services o a CP+. 3%e ollowin,
errors were discovered by t%e CP+-
KKK200/KK KKK2006KKK
Net income ater income ta' P 12!,2/0 P 1/6,2/0
0nventory understatement at year:end P : P 12,/00
22

Prepaid e'penses not ta7en up /,000 1/,000
=erc%andise purc%ased on account not
Recorded as liability but included in
inventory 2/,000
<nearned rent received ta7en into income *,000
+ccrued ta'es unrecorded 20,000 1/,000
+uestions
1. Net income o 200/ is-
a. P 16!,2/0 b. P 108,2/0 c. P 8!,2/0 d. P &!,2/0
2. Net income o 2006 is-
a. P 1**,&/0 b. P 1&1,&/0 c. P 111,&/0 d. P 112,2/0
Solution
2005 2006
:nadusted net inco!e 123'250 156'250
12'500
5'000 -5'000.
15'000
-25'000. 25'000
-*'000.
-20'000. 20'000
9999999999 -15'000.
#dusted net inco!e )3'250 1**'(50
#ns$er%
1& 5 2& #
Problem 1O
(i9ard Company, a calendar:year sole proprietors%ip, maintained its boo7s on t%e cas%
basis durin, t%e year
(i9ard is in t%e process o ne,otiatin, a ban7 loan to inance t%e planned e'pansion o its
business. 3%e ban7 is re4uestin, 2006 inancial statements prepared on t%e accrual basis o
accountin, rom (i9ard. +s (i9ard#s e'ternal auditor, you were called upon to assist in
preparin, t%e inancial statements. 3%e ollowin, inormation were obtained durin, t%e
course o your en,a,ement-
(i9ard Company
3R0+F A+F+NC>
"ecember !1, 2006
"ebits Credits
Cas% P118,000
+ccounts receivable, 12E!1E0/ 28!,/00
0nventory, 12E!1E0/ 1,08/,000
;urniture N ;i'tures 2,068,/00
Fease%old improvements &8&,/00
+ccumulated depreciation, 12E!1E0/ P /6&,000
+ccounts payable 2*&,/00
(i9ard, "rawin,s
(i9ard, Capital, 12E!1E0/ 2,180,/00
8ales 11,12&,/00
Purc%ases /,!!*,2/0
8alaries e'pense !,01/,000
3a'es and licenses 21&,000
0nsurance e'pense 1/2,2/0
Rent e'pense /*8,/00
23

<tilities e'pense 220,/00
Fivin, e'penses 22&,/00 KKKKKKKKK
P 11,1&2,/00 P 11,1&2,/00
+dditional inormation-
1. +t "ecember !1, 2006, amounts due rom customers totaled P11/,000.
2. Aased on t%e analysis o t%e above receivables, P20,&/0 may prove uncollectible.
!. <npaid invoices or t%e plant purc%ases totaled P/!!,&/0 and P2*&,/00 at "ecember !1,
2006 and "ecember !1, 200/ respectively.
1. 3%e inventory totaled P1,2&1,000 based on a p%ysical count o t%e ,oods at "ecember
!1, 2006. 3%e inventory was priced at cost, w%ic% appro'imates mar7et value.
/. On =ay 1. 2006, (i9ard paid P1/2,2/0 to renew its compre%ensive insurance covera,e
or one year. 3%e premium on t%e previous policy, w%ic% e'pired on +pril !0, 2006, was
P1!6,/00.
6. On .anuary 2, 2006, (i9ard entered into a twenty:year operatin, lease or t%e vacant
lot ad$acent (i9ard#s retail store used as a par7in, lot. +s a,reed in t%e lease, (i9ard
paved and enced in t%e lot at a cost o P&8&,/00. 3%e improvements were completed on
+pril 1, 2006, and estimated to %ave a useul lie o iteen years. No provision or
depreciation %as been recorded. "epreciation on urniture and i'tures was P210,000 or
2006.
&. +ccrued e'penses at "ecember !1, 2006 and 200/ were as ollows-
2006 200/
3a'es and licenses P!!,&/0 P20,2/0
<tilities !6,000 21,&/0
P6*,&/0 P1/,000
8. (i9ard is bein, sued or P1,000,000. 3%e covera,e under t%e compre%ensive insurance
policy is limited to P2,/00,000. (i9ard#s attorney believes t%at an unavorable outcome
is probable and t%at a reasonable estimate o t%e settlement is P!,000,000.
*. 3%e salaries account includes P10,000 per mont% paid to t%e proprietor. (i9ard also
receives P1,!&/ per wee7 or livin, e'penses.
+uestions
"etermine t%e balances o t%e ollowin, under t%e accrual basis o accountin,.
1. +ccounts Receivable
a. 11/,000 b. P 28!,/00 c. P 1!1,/00 d. P 1/2,000
2. +ccounts Receivable, net
a. P 108,12/ b. P 101,62/ c. P !*1,2/0 d. P 262,/00
!. 0nventory
a. P 1,2&1,000 b. P 1,08/,000 c. P 18*,000 d. P 8*6,000
1. Prepaid 0nsurance
a. P 11&,000 b. P *6,2/0 c. P /0,&/0 d. P0
24

/. Property and e4uipment, net
a. P 2,8/6,000 b. P 2,616,16* c. P 2,0!*,62/ d. P 1,8/8,/00
6. +ccounts payable
a. P /!!,&/0 b. P /2!,&/0 c. P 2*&,/00 d.P 2!6,2/0
&. +ccrued >'penses
a. P 111,&/0 b. P 6*,&/0 c. P 21,&/0 d. P0
8. (i9ard, "rawin,s
a. P &0&,/00 b. P 180,000 c. P 22&,/00 d. P0
*. (i9ard, Capital, 12E!1E0/
a. P 2,226,000 b. P 2,181,000 c. P 2,180,/00 d. P 2,1!/,/00
10. 8ales
a. P 11,812,/00 b. P 11,//*,000 c. P 11,12&,/00 d. P 11,2*6,000
11. Purc%ases
a. P /,8&!,000 b. P /,/&/,/00 c. P /,!!*,2/0 d. P /,10!,000
12. 8alaries >'pense
a. P !,2&2,/00 b. P !,01/,000 c. P 2,6//,000 d. P 2,/6/,000
1!. 3a'es and licenses
a. P 2/0,&/0 b. P 2!0,/00 c. P 21&,000 d. P 20!,/00
11. 0nsurance e'pense
a. P 1*&,&/0 b. P 11&,000 c. P 1/2,2/0 d. P 101,/00
1/. <tilities e'pense
a. P 2/6,/00 b. P 2!1,&/0 c. P 220,/00 d. P 1*/,&/0
16. "oubtul account e'pense
a. P 20,&/0 b. P 10,!&/ c. P 6,/&/ d. P 0
1&. "epreciation e'pense
a. P 2*1,!&/ b. P 21*,!&/ c. P 2!*,/!1 d. P 210,000
18. Cost o sales
a. P /,!86,/00 b. P /,!68,/00 c. P /,1/0,2/0 d. P 1,06/,000
1*. >stimated loss rom lawsuit
a. P 1,000,000 b. P !,000,000 c. P /00,000 d. P0
Solution
1& # 6 P415'000 gi3en in ite! no& 1
2& 5 6 P3*4'250 -P415'000 ; P20'(50 ite! no& 2.
3& # 6 P1'2(4'000 gi3en in ite! no& 4
4& 5 6 P152'250 x 4/12 E P50'(50
5& 5
7urniture / 1ixtures 2'06)'500
2ease<old i!pro3e!ents ()('500
2ess% #ccu!ulated depCn ; 1/1/02 - 56('000.
2002 ,epreciation ; i!pro3e& - 3*'3(5.
25

2002 ,epCn ; 1urniture - 210'000.
5arrying 3alue ; 2002 2'03*'625
6& # 6 P533'(50 gi3en in ite! no& 3
(& 4 6 P6*'(50 gi3en in ite! no& (
)& #
0alaries ; P40'000 x 12 6 P 4)0'000
2i3ing allo$ance P4'3(5 x 52 $eeBs 6 22('500
=otal (0('500
*& 4
5apital ; beg& 2'1)0'500
F!ission o1 prepaid expense in 2001 45'500
F!ission o1 accrued expenses in 2001 - 45'000.
=otal 2'1)1'000
10& 4
0ales ; cas< basis 6 11'42('500
G #R ; end 6 415'000
6 #R ; beg 6 2)3'500
0ales ; accrual basis 6 11'55*'000
11& 4
Purc<ases ; cas< basis 6 5'33*'250
G #P ; end 6 533'(50
6 #P ; beg 6 2*('500
Purc<ases ; accrual basis 6 5'5(5'500
12& ,
0alaries per record 6 3'045'000
6 0alaries o1 t<e proprietor H 6 4)0'000
#dusted 0alaries 6 2'565'000
H 0alaries o1 t<e proprietor 1or a partners<ip is considered as part o1 pro1it distribution
13& 4
=axes and licenses ; cas< basis 6 21('000
G #ccrued taxes ; end 6 33'(50
6 #ccrued taxes ; beg 6 20'250
=axes and licenses ; accrual basis 6 230'500
14& 4
Insurance expense ; cas< basis 6 152'250
G Prepaid insurance ; beg 6 45'500
6 Prepaid insurance ; end 6 50'(50
Insurance expense ; accrual basis 6 14('000
15& 4
:tilities ; cas< basis 6 220'500
G #ccrued utilities ; end 6 36'000
6 #ccrued utilities ; beg 6 24'(50
:tilities ; accrual basis 6 231'(50
16& # ; gi3en in ite! I 2
1(& 4 ; re1er to +uestion I 5 ?uestion
1)& #
4eginning in3entory 6 1'0)5'000
Purc<ases 6 5'5(5'500
Ending in3entory 6 -1'2(4'000.
5ost o1 0ales 6 5'3)6'500
1*& 5
0ince t<ere is a co!pre<ensi3e insurance policy 1or t<e da!age' only P500'000 $ill be c<arged as loss -3@ ;
2&5@.
Problem 11
Cou %ave been en,a,ed to e'amine t%e inancial statements o Mince Corporation or t%e
year ended "ecember !1, 2006. 0n t%e course o your e'amination, you %ave ascertained
t%e ollowin, inormation-
1. Mince uses t%e allowance met%od o accountin, or uncollectible trade accounts
receivable. 3%e allowance is based upon !2 o past due accounts 5over 120 days6 and
12 o current accounts as o t%e close o eac% mont%. "ue to t%e c%an,in, economic
conditions and climate, t%e amount o past due accounts %as increased si,niicantly, and
26

mana,ement %as decided to increase t%e percenta,e based on past due accounts to /2.
3%e ollowin, balances are available-
+s o
Nov. !0, 2006
+s o
"ec. !1, 2006
"ebit Credit "ebit Credit
+ccounts Receivable P !*0,000 : P 1!0,000 :
Past due accounts 5included
in +ccounts Receivable6
12,00
0 : !0,000 :
+llowance or uncol:
lectible accounts : P 28,000 *,000 :
2. 3%e merc%andise inventory on "ecember !1, 200/ did not include merc%andise
%avin, a cost o P&,000.00 w%ic% was stored in a public ware%ouse. =erc%andise %avin,
a cost o P!,000.00 was erroneously counted twice and included twice in t%e
merc%andise inventory on "ecember !1, 2006. Mince uses a periodic inventory system.
!. On .anuary 2, 2006, Mince %ad a new mac%ine delivered and installed in its new
actory. 3%e cost o t%is mac%ine was P*&,000.00 and t%e mac%ine is bein, depreciated
on a strai,%t:line met%od over an estimated useul lie o 10 years. (%en t%e new
mac%ine was installed, Mince paid or t%e ollowin, items w%ic% were not included in t%e
cost o t%e mac%ine, but were c%ar,ed to repairs and maintenance-
"elivery >'pense : P 2,/00.00
0nstallation Costs : 8,000.00
Rearran,ement o related >4uipment : 1,000.00
P11,/00.00
1. On =ay !, 2006, Mince e'c%an,ed /00 s%ares o treasury stoc7 5P/0.00 par value
common stoc76 or a parcel o land to be used as a site or a new actory. 3%e treasury
stoc7 %ad a cost P&0.00 per s%are w%en it was ac4uired and on =ay 0!, 2006, it %ad a
air value o P80.00 per s%are. Mince received P2,000.00 w%en an e'istin, buildin, on
t%e land was sold or scrap. 3%e land was capitali9ed at P10,0000.00 and Mince recorded
a ,ain o P/,000.00 on t%e sale o its treasury stoc7.
Cou ound t%e ollowin, $ournal entries in t%e boo7s-
Fand . . . . . . . . . . . . . . . P 10,000.00
3reasury stoc7 . . . . . . . . . . . . . . P !/,000.00
Dain on 8ale o treasury stoc7 . . . . . /,000.00

Cas% . . . . . . . . . . . . . . . P 2,000.00
=iscellaneous 0ncome . . . . . . . . . . P 2,000.00
/. On .anuary 02, 2006, Mince Corporation establis%ed a noncontributory deined
beneit plan coverin, all employees and contributed P 1,000,000.00 to t%e plan and
c%ar,ed t%is amount to t%e Hpension e'penseI. +t "ecember !1, 2006, Mince
determined t%at t%e 2006 current service and interest costs on t%e plan amount to P
620,000,00. 3%e e'pected and actual rate o return on plan assets or 2006 was 102.
+uestions
1. 3%e allowance or uncollectible accounts to be reported on t%e Aalance 8%eet is-
a. P 11,/00.00 b. P *,000.00 c. P /,/00.00 d. P 1,000.00
27

2. "oubtul account e'pense at "ecember !1, 2006 is-
a. P 11,/00.00 b. P *,000.00 c. P /,/00.00 d. P 1,000.00
!. 2006 merc%andise inventory is-
a. <nderstated by P 10,000.00 c. Overstated by P !,000.00
b. <nderstated by P 1,000.00 d. Overstated by P 1,000.00
1. 0 no proper correctin, entries were made at "ecember !1, 200/, by %ow muc% will
200/ net income beore income ta'es be overstated or understated)
a. <nderstated by P&,000.00 c. Overstated by P &,000.00
b. <nderstated by P1,000.00 d. Overstated by P 1,000.00
/. =ac%inery and e4uipment account s%ould be reported in t%e balance s%eet 5net o
accumulated depreciation6 at "ecember !1, 2006-
a. P 100,!/0.00 b. P 110,0/0.00 c. P 111,/00.00 d. P 101,800.00
6. Fand account s%ould be reported in t%e balance s%eet at "ecember !1, 2006-
a. P !/,000.00 b. P !!,000.00 c. P 10,000.00 d. P !8,000.00
&. (%at s%ould be reported at "ecember !1, 2006 as prepaid pension cost)
a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 180,000.00
8. (%at amount s%ould be reported as pension e'pense in 2006)
a. P 620,000.00 b. P /20,000.00 c. P 1,000,000.00 d. P 180,000.00
*. @ow muc% ,ain s%ould be reported on item no. 1)
a. P /,000.00 b. P 1/,000.00 c. P 10,000.00 d. P 0
10. 0 no proper correctin, entries were made at "ecember !1, 2006, by %ow muc% will
2006 net income beore income ta'es be overstated or understated)
a. <nderstated by P 1*!,1/0.00 c. Overstated by P /!*,0/0.00
b. <nderstated by P /!1,0/0.00 d. Overstated by P 1*8,1/0.00
Solution
-1. ,oubt1ul #ccount Expense 14'500&00
#llo$ance 1or ,/# 14'500&00
Re?uired allo$ance as o1 12&31&2006
6on past due accounts -5J x P30'000&00. P 1'500&00
6on current accounts -1J x P400'000&00. 4'000&00
=otal P 5'500&00
:nadusted KdebitL balance o1 #llo$ance 1or ,/# *'000&00
#dditional Pro3ision -expense. P14'500&00
-2. a& @erc<andise In3entory' 01&01&2006 ('000&00
Retained Earnings ('000&00
-to correct understate!ent o1 in3entory at end o1 2005.
b& 5ost o1 0ales 3'000&00
@erc<andise In3entory' 12&31&2006 3'000&00
-to correct o3erstate!ent ending in3entory 1or 2006.
-3. a& @ac<inery 14'500&00
Repairs and @aintenance 14'500&00
-to reclassi1y deli3ery and installation costs.
b& ,epreciation Expense 1'450&00
#ccu!ulated ,epreciation 1'450&00
-to pro3ide 1or depreciation 1or ite!s not capitaliAed.
-4. @iscellaneous Inco!e 2'000&00
8ain on 0ale o1 =reasury 0tocB 5'000&00
2and 2'000&00
#PI56=/0 5'000&00
28

-to correct clientCs entry on t<e purc<ase o1 land.
-5. Prepaid Pension 5ost 4)0'000&00
Pension Expense 4)0'000&00
-to correct clientCs entry in t<e treat!ent o1 prepaid pension cost.
5urrent 0er3ice and interest cost P 620'000&00
Expected return on Plan #sset
-P 1'000'000&00 x 10J. - 100'000&00.9
Pension Expense P 520'000&00
Reported pension expense 1'000'000&00
Prepaid Pension 5ost P 4)0'000&00
#ns$er%
1& 5 2& # 3& 5 4& # 5& # 6& , (& , )& 4 *& , 10& ,
Problem 12
Ron:Ron 8tora,e underwent a restructurin, in 2006. 3%e company conducted a t%orou,%
internal audit, durin, w%ic% t%e ollowin, acts were discovered. 3%e audit occurred durin,
2006 beore any ad$ustin, entries or closin, entries are prepared.
a. +dditional printers were ac4uired at t%e be,innin, o 2001 and added to t%e company#s
oice networ7. 3%e P*,000 cost o t%e printers was inadvertently recorded as
maintenance e'pense. 3%e printers %ave ive:year useul lives and no material salva,e
value. 3%is class o e4uipment is depreciated by t%e strai,%t:line met%od.
b. 3%ree wee7s prior to t%e audit, t%e company paid P/1,000 or stora,e bo'es and
recorded t%e e'penditure as oice supplies on %and. 3%e error was discovered a wee7
later.
c. On "ecember !1, 200/, inventory was understated by P112,000 due to a mista7e in t%e
p%ysical inventory count. 3%e company uses t%e periodic inventory system.
d. 3%ree years earlier, t%e company recorded a !2 stoc7 dividend 51,000 common s%ares,
P16 as ollows-

Retained earnin,s 1,000
Common stoc7 1,000
3%e s%ares %ad a mar7et price at t%e time o P10 per s%are.
e. +t t%e end o 200/, t%e company ailed to accrue interest e'pense t%at accrued durin,
t%e last our mont%s o 200/ on bonds payable. 3%e bonds w%ic% were issued at ace
value mature in 2010. 3%e ollowin, entry was recorded on =arc% 1, 2006, w%en t%e
semi:annual interest was paid-
0nterest e'pense 180,000
Cas% 180,000
. + t%ree:year liability insurance policy was purc%ased at t%e be,innin, o 200/ or
P216,000. 3%e ull premium was debited to insurance e'pense at t%e time.
+uestions
1. Net income o 2001 is-
a. Overstated by P*,000 c. Overstated by P&,200
b. <nderstated by P*,000 d. <nderstated by P&,200
29

2. Net income o 200/ is
a. <nderstated by P!&1,200 c. <nderstated by P8*,800
b. <nderstated by P1!1,200 d. Overstated by P81,800
!. Net income o 2006 is
a. Overstated by P6/,800 c. Overstated by P!0/,800
b. Overstated by P18/,800 d. <nderstated by P!8,200
1. +ccrued interest on Aonds Payable is
a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000
Solution
2004 2005 2006
# *'000
-1')00. -1')00. -1')00.
4
5 112'000 -112'000.
,
E -120'000. 120'000
-120'000.
7 999999999 144'000 -(2'000.
:nder/-F3er. ('200 134'200 1)5')00
#ns$er%
1& , 2& 4 3& 4 4& 5
Problem 13
Cou been as7ed by a client to review t%e records o t%e Claire .oy Company, a small
manuacturer o precision tools and mac%ines. Cour client is interested in buyin, t%e
business, and arran,ements %ave been made or you to review t%e accountin, records.
Cour e'amination reveals t%e ollowin,-
a. Claire .oy Company commenced business on +pril 1, 200!, reportin, on a iscal year
endin, =arc% !1. 3%e company %as never been audited, but t%e annual statements
prepared by t%e boo77eeper relect t%e ollowin, income beore closin, and beore
deductin, income ta'es-
Cear >nded =arc% !1 0ncome Aeore 3a'es
2001OOOOOOOOOOOOOOO P &1,600
200/OOOOOOOOOOOOOOO 111,100
2006OOOOOOOOOOOOOOO 10!,/80
b. + relatively small number o mac%ines %ave been s%ipped on consi,nment. 3%ese
transactions %ave been recorded as an ordinary sale and billed as suc%. On =arc% !1 o
eac% year, mac%ines billed and in t%e %ands o consi,nees amounted or-
2001OOOOOOOOOOOOOO.. P&, 800
200/OOOOOOOOOOOOOO.. none
2006OOOOOOOOOOOOOO.. /, /*0
8ales price was determined by addin, !02 to cost. Cou learned t%at t%e consi,ned
,oods were sold t%e ollowin, year.
c. On =arc% !0, 200/, two mac%ines were s%ipped to a customer on a C.O.". basis. 3%e
sale was not entered until +pril /, 200/ w%en cas% was received or P6,100. 3%e
mac%ines were not included in t%e inventory at =arc% !1, 200/. 53itle passed on =arc%
!0, 200/6.
30

d. +ll mac%ines are sold sub$ect to a ive:year warranty. 0t is estimated t%at t%e
e'pense ultimately to be in connection wit% t%e warranty will amount to P o 12 o
sales. 3%e company %as c%ar,ed an e'pense account or warranty costs incurred.
8ales per boo7s and warranty costs were-
Marranty o1 Expense 1or 0ales @ade in
Year Ended @arc< 310ales 2004 2005 2006 =otal
2001 P*10, 000 P&60 P&60
200/ 1, 010, 000 !60 P1, !10 1, 6&0
2006 1, &*/, 000 !20 1, 620 P1, *10 !, 8/0
e. 3%e ban7 deducts 62 on all contracts inanced. O t%is amount P2 is place in a
reserve to t%e credit o Claire .oy Company, w%ic% is reunded to Claire .oy as inance
contracts are paid in ull. 3%e reserve establis%ed by t%e ban7 %as not been relected in
t%e boo7s o Claire .oy. 3%e e'cess o credits over debits 5net increase6 to t%e reserve
account wit% Claire .oy, on t%e boo7s o t%e ban7 or eac% iscal year were as ollows-
2001OOOOOOOOOOOOO. P 1, 000
200/OOOOOOOOOOOOO. 1, 000
2006OOOOOOOOOOOOO. /, 000
P 11, 000
. + delivery e4uipment wit% a 10:year lie 5no residual value, strai,%t:line depreciation6
was purc%ased on +pril 1, 200/ by issuin, a P 600,000 non: interest: bearin,, 1 year
note. 3%e entry made to record t%e purc%ase was a debit to "elivery >4uipment and a
credit to Notes payable or P 600,000G a 102 is a air rate o interest on t%e note. 3%e
accountant ailed to provide or depreciation or t%e year on t%is e4uipment.
,. ;or t%e last t%ree 5!6 years, t%e company %as ailed to accrue salaries and wa,es. 3%e
correct amounts at t%e end o eac% iscal year were-
2001OOOOOOOOOOOOO. P 12, 000
200/OOOOOOOOOOOOO. 18, 000
2006OOOOOOOOOOOOO. 10, 000
+uestions
+nswer t%e ollowin, 4uestions based on t%e audit indin,s. 0,nore income ta' implications.
1. 3%e ad$ustin, entry to set up t%e estimated Fiability under (arranties is
a. (arranty e'pense /,111
Retained earnin,s &,006
>stimated liability under warranties 12,11&
b. Retained earnin,s /,111
(arranty e'pense &,006
>stimated liability under warranties 12,11&
c. (arranty e'pense 12,11&
>stimated liability under warranties 12,11&
d. Retained earnin,s 12,11&
>stimated liability under warranties 12,11&
2. 3%e total receivable rom t%e ban7 representin, dealers und reserve as o
=arc% !1, 2006 is-
a. P /,100 b. P 6,*00 c. P 12,000 d. P 11,000
!. 8ales in 2001 were 5over6 understated by
a. P 6,/00 b. P 56,/006 c. P &,800 d. P 5&,8006
31

1. 8ales in 2006 were 5over6 understated by-
a. P 6,/00 b. P 56,1006 c. P 5/,/*06 d. P 511,6*06
/. 3%e accrued 8alaries Payable t%at s%ould be set up on =arc% !1, 2006 is-
a. P 18,000 b. P 28,000 c. P 10,000 d. P 10,000
6. 3%e audited balance o "iscount on Note Payable as o =arc% !1, 2006 is-
a. P 0 b. P 102, 1/2 c. P 11*, 211 d. P 1*0, 1*2

&. "epreciation >'pense or iscal year 2006 t%at s%ould be provided on t%e
e4uipment purc%ased on +pril 1, 200/ is
a. P 1!,660 b. P 10,*81 c. P 60,000 d. P 66,000
Solution
#dusting entry%
b& 0ales 5'5*0
#ccounts recei3able 5'5*0
In3entory 4'300
5ost o1 sales 4'300
c& 0ales 6'100
Retained earnings 6 beg 6'100
d& Marranty expense 12'41(
Esti!ated $arranty payable 12'41(
2004 *40'000 ; (')00 E *32'200
2005 1'010'000 G 6'100 ; (')00 E 1'023'*00
2006 1'(*5'000 ; 5'5*0 ; 6'100 E 1'()3'310
#dusted balance E 3'(3*'410
N O o1 1J E &005
=otal Marranty expense E 1)'6*(
2ess% Marranty paid E 6'2)0
Esti!ated $arranty liability E 12'41(
e& 7und reser3e 1ro! t<e banB 14'000
Ft<er inco!e 14'000
1& FE% ,eli3ery e?uip!ent 600'000
"otes payable 600'000
5E% ,eli3ery e?uip!ent 40*')0)
,iscount on "P 1*0'1*2
"otes payable 600'000
#d% ,iscount on "P 1*0'1*2
,eli3ery e?uip!ent 1*0'1*2
#d% Interest expense 40'*)1
,iscount on "P 40'*)1
P40*')0) x 10J E P 40'*)1
g& Retained earnings 1)'000
0alaries 1)'000
0alaries 10'000
#ccrued salaries 10'000
#ns$er%
1& 5 2& , 3& , 4& , 5& 5 6& 5 (& 4
Problem 14
Cou are auditin, t%e accounts o Leit% Qandro =erc%andisin, Corporation or t%e year ended
"ecember !1, 2006. Cou discover t%at t%e ad$ustments made in t%e previous audit or t%e
year 200/ were not entered in t%e accounts by Leit% Qandro#s boo77eeperG t%ereore, t%e
accounts are not in a,reement wit% t%e audited amounts as o "ecember !1, 200/. 3%e
ollowin, ad$ustments were included in t%e 200/ audit report-
32

a. 0nvoices or merc%andise purc%ased on credit in "ecember 200/ were not
entered on t%e boo7s until payment o P12,000 was made in .anuary 2006. 3%e
merc%andise was not included in t%e "ecember !1, 200/ inventory. 3%e company uses a
periodic inventory system.
b. 0nvoices or merc%andise received on credit in "ecember 200/ were not recorded
in t%e accounts until payment was made in .anuary 2006G t%e ,oods were included in
t%e 200/ endin, inventory, P18,000.
c. +llowance or doubtul accounts or 200/ was understated by P2,000 because bad
debts e'pense in 200/ was not recorded.
d. 8ellin, e'pense or 200/, P/,000, was not recorded in t%e accounts until paid in
2006.
e. +ccrued wa,es o P1,000 at "ecember !1, 200/, were not recorded in t%e
accounts until paid in .anuary 2006.
. Prepaid insurance at "ecember !1, 200/ was understated by P600 because t%is
amount was included in 200/ e'pense. 3%e insurance policy e'pires on "ecember !1,
2006.
,. 0ncome ta' e'pense o P2,100 or t%e last part o t%e year ended "ecember !1,
200/, was not recorded until paid in .anuary 2006.
%. "epreciation o P*,000 was not recorded or 200/.
+uestions%
Aased on t%e inormation ,iven, answer t%e ollowin,-
1. Net income o 200/ is overstated by
a. P 10,100 b. P !*,800 c. P !8,100 d. P 2*,100
2. Net income o 2006 is understated by
a. P 10,800 b. P !*,800 c. P 28,800 d. P 2&,800
!. Operatin, e'penses o 200/ is understated by
a. P 21,800 b. P 21,800 c. P 20,600 d. P 1*,100
1. Operatin, e'pense o 2006 is overstated by
a. P 21,800 b. P 10,800 c. P *,000 d. P 8,100
/. Cost o sales o 2006 is
a. Overstated by P18,000 c. <nderstated by P6,000
b. <nderstated by P18,000 d. Not aected wit% error
Solution
NET INCOME
2005 2006
#& F!ission o1 purc<ases -12'000. 12'000
F!ission o1 in3entory 12'000 -12'000.
4& F!ission o1 purc<ases -1)'000. 1)'000
5& -2'000.
, -5'000. 5'000
E -4'000. 4'000
33

7 600 -600.
8 -2'400. 2'400
D -*'000. 9999999
-3*')00. 2)')00
FPER#=I"8 ENPE"0E0
2005 2006
#

4&
5& -2'000.
, -5'000. 5'000
E -4'000. 4'000
7 600 -600.
8
D -*'000. 9999999
-1*'400. )'400
#ns$er%
1& 4 2& 5 3& , 4& , 5& #
Pro0blem 15
3uburan Company was or,ani9ed durin, 2002 by t%ree tec%nical e'perts to assemble 5parts
to be purc%ased rom suppliers6 and mar7et an electronic device t%at t%ey %ad previously
patented. No products were sold durin, 2002G %owever, 200! and 2001 produced si,niicant
sales, but modest proits. "urin, 200!, t%e company %ired boo77eeper w%o, alt%ou,% very
industrious, %ad very little 7nowled,e o accountin,. Reali9in, t%is competency problem, t%e
company is considerin, en,a,in, an outside independent CP+ to as t%ey said Hstrai,%ten
t%in,s out and ma7e recommendations.I +mon, numerous ot%er accountin, problems,
ad$ustin, entries %ave never been made. 3%e boo77eeper stated t%at Ht%e transactions are
recorded in t%e ri,%t way w%en t%ey occur.I
3%e ollowin, 200/ transactions, and t%e way in w%ic% t%e boo77eeper recorded or
e'plained t%em, are bein, discussed-
a. 0nventory J endin, 2001, P!0,000G endin, 200/, P1&,000 5by inventory count6.
0nventory o parts 1&,000
Purc%ases 1&,000
b. "epreciation J e4uipment 5purc%ased at t%e be,innin, o 20016 cost, P80,000G
estimated useul lie, 10 yearsG manuacturer#s recommended value at end o / years,
P10,000.
"epreciation e'pense &,000
>4uipment &,000
c. <npaid wa,es at year:end 2001, P!,000G 200/, P11,000.
Record w%en paid, because t%at is w%en t%e wa,es re4uires t%e payment o resources
and Hit all events out anyway.I
d. Note payable, P60,000, ive:year, 1/2, interest payable eac% October !1G si,ned
November 1, 2001.
0nterest e'pense *,000
Cas% *,000
4ecause t<is is t<e correct a!ount o1 interest eac< year
34

e. Contract to deliver si' electronic devices, si,ned October 1/, 200/, pendin,
assembly, P1/,000.
"ue rom customers 1/,000
8ales 1/,000
. Property ta'es or 200/, billed in November 200/, payable wit%out penalty up to
;ebruary 1/, 2001, P*,000. Paid on ;ebruary 11, 2006.
;ebruary 11, 2006-
Property ta'es *,000
Cas% *,000
,. +dvertisin, costs or "ecember 200/, C%ristmas season, P1&,000. Paid, wit%in t%e
!0:day credit period, on .anuary 26, 2006.
.anuary 26, 2006-
+dvertisin, 1&,000
Cas% 1&,000
+uestions%
Aased on t%e inormation ,iven, answer t%e ollowin,-
1. 0nterest e'pense o t%e P60,000 note at "ecember !1, 200/ is
a. P 10,/00 b. P *,000 c. P &,/00 d. P 1,/00
2. 0nterest payable at "ecember !1, 200/ is
a. P *,000 b. P &,/00 c. P 1,/00 d. P &/0
!. 0nventory at "ecember !1, 200/ is
a. P 61,000 c. P !0,000
b. P 1&,000 d. Cannot be determined
1. (a,es e'pense at "ecember !1, 200/ is
a. <nderstated by P 11,000 c. <nderstated by P 8,000
b. <nderstated by P 11,000 d. Correctly stated
/. +ccrued e'penses at "ecember !1, 200/ is understated by
a. P !8,/00 b. P 12,/00 c. P 11,&/0 d. P 11,000
Solution
1& 4
P 60'000 x 15J E P *'000
2& 5
P 60'000 x 15J x 2/12 E P 1'500
3& 4 8i3en in ite! #
4& 5
Retained earnings 3'000
Mages expense 3'000
Mages expense 11'000
Mages payable 11'000
5& #
Interest payable 1'500
Mages payable 11'000
Property taxes *'000
#d3ertising 1('000
=otal 3)'500
35

Problem 16
Aran9uela Corporation reported t%e ollowin, amounts o net income or t%e years ended
"ecember !1, 200!, 2001 and 200/-
200! P12&,000
2001 1/0,000
200/ 128,/00
Cou are perormin, t%e audit or t%e year ended "ecember !1, 200/. "urin, your
e'amination, you discover t%e ollowin, errors-
a. +s a result o errors in t%e p%ysical count, endin, inventories were misstated as ollows-
"ecember !1, 2001 P11,000 understated
"ecember !1, 200/ P2!,000 overstated
b. On "ecember 2*, 200/, Aran9uela recorded as a purc%ase, merc%andise in transit,
w%ic% cost P1/,000. 3%e merc%andise was s%ipped ;OA "estination and %ad not arrived
by "ecember !1. 3%e merc%andise was not included in t%e endin, inventory.
c. Aran9uela records sales on t%e accrual basis but ailed to record sales on account made
near t%e end o eac% year as ollows
200! P1,000
2001 /,000
200/ !,/00
d. 3%e company ailed to record accrued oice salaries as ollows-
"ecember !1, 200! P10,000
"ecember !1, 2001 11,000

e. On =arc% 1, 2001, a 102 stoc7 dividend was declared and distributed. 3%e par value o
t%e s%ares amounted to P10,000 and mar7et value was P1!,000. t%e stoc7 dividend was
recorded as ollows-
=iscellaneous e'pense P1!,000
Common stoc7 10,000
Retained earnin,s !,000
. On .uly 1, 2001, Aran9uela ac4uired a t%ree:year insurance policy. 3%e t%ree:year
premium o P6,000 was paid on t%at date, and t%e entire premium was recorded as
insurance e'pense.
36

,. On .anuary 1, 200/, Aran9uela retired bonds wit% a boo7 value o P120,000 or
P106,000. 3%e ,ain was incorrectly deerred and is bein, amorti9ed 10 years as a
reduction o interest e'pense on ot%er outstandin, obli,ations.
+uestions%
1. (%at is t%e ad$usted net income or t%e year ended "ecember !1, 200!)
a. P1!!,000 b. P121,000 c. P11&,000 d. P11!,000

2. (%at is t%e ad$usted net income or t%e year ended "ecember !1, 2001)
a. P1/*,000 b. P160,000 b. P1&*,000 c. P18&,000

!. (%at is t%e ad$usted net income or t%e year ended "ecember !1, 200/)
a. P12*,600 b. P1!1,600 c. P1!*,600 d. P112,600
1. (%at ad$ustin, entry s%ould be made on "ecember !1, 200/ to correct t%e error
described in item A)
a. +ccounts payable 1/,000
Purc%ases 1/,000
b. Purc%ases 1/,000
+ccounts payable 1/,000
c. +ccounts payable 1/,000
Cas% 1/,000
d. +ccounts payable 1/,000
Retained earnin,s 1/,000

/. 3%e ad$ustin, entry on "ecember !1, 2001 to correct t%e error described in item >
s%ould include a debit to
a. Common stoc7 P10,000 c. +dditional paid in capital, P!,000
b. Retained earnin,s, P16,000 d. =iscellaneous e'penses, P!,000
Solution
2003 2004 2005
:nadusted "et Inco!e 12('000 150'000 12)'500
# 14'000 -14'000.
-23'000.
4 15'000
5 4'000 -4'000.
5'000 -5'000.
3'500
, -10'000. 10'000
-14'000. 14'000
E 13'000
7 5'000 -2'000.
8 14'000
99999999999 99999999999 -1'400.
#dusted "et Inco!e 121'000 1(*'000 12*'600
#ns$er%
1& 4 2& # 3& , 4& # 5& 4
37