ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Webinar Series  PALAWAN STATE UNIVERSITY  Weeks 1 & 2

AUDITING (Auditing Problems) S. IRENEO  C. ESPENILLA

AP-100: ERROR CORRECTION, ACCOUNTING CHANGES,

CASH-ACCRUAL & SINGLE ENTRY
PROBLEM 1 (ERROR CORRECTION)

Koshu Co., a calendar year entity, contained the following independent errors at the end of each
reporting period: (Amounts in thousands)

2020 2019 2018

Accounts Payable 50 under 40 under 20 over
Depreciation Expense 12 under 16 under
Merchandise Inventory 97 over 68 under 33 over
Accrued Income 33 over 25 under 45 under
Unearned Income 56 under 14 under 27 over
Advances to Suppliers 105 under 85 over 45 under
Advances from Customers 68 under 82 over 71 under
Accounts Receivable 85 under 92 over 78 under
Accrued Expense 18 under 19 over 27 under
Prepaid Expense 12 under 17 over

Compute for the following:

a. Net adjustments on 2018 and 2020 Profits
b. Effects of errors on the 2019 and 2020 Accumulated Profits
c. Net adjustments to 2018 and 2019 Working Capital
d. Adjusted total 2018 and 2020 Total Assets assuming unadjusted balances of total assets
of 2018 and 2020 were P890 and P920, respectively
e. Effects of errors on 2018 and 2019 Total Liabilities

PROBLEM 2: (CHANGE IN ACCOUNTING POLICY)

Shilo Co. has been using the weighted average method of inventory costing since it began
operations in 2018. Shilo Co. has reported the following net income:

Net income Under Weighted Average Method

2018 P 400,000
2019 285,000
2020 320,000

Beginning 2021 the company decided to change the inventory cost formula to FIFO method. The
following are the December 31 inventory balances under each method:

MI, end Per Books MI, End MI, End Per Books
(Weighted Average) (FIFO) Understated By
2018 P 180,000 P 200,000 P 20,000
2019 250,000 310,000 60,000
2020 330,000 440,000 110,000

Compute for the following:

a. Restated net income for 2019 and 2020 as a result of the change in policy
b. Adjustment to the accumulated profits beginning balance of 2021 as a result of the
change

Page 1 of 4 0915-2303213/0908-6567516  [email protected]

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1 & 2: ERROR CORRECTION, ACCOUNTING CHANGES, CASH-ACCRUAL & SINGLE ENTRY

PROBLEM 3: (CHANGE IN ACCOUNTING ESTIMATE)

Crisha Company purchased an equipment at the beginning of 2018 in the amount of P1,600,000.
The company depreciates this asset over an 8-year period, with a salvage value of 10% of original
cost. At the beginning of 2020, the following changes were put into effect:
a. Remaining life has been extended by three years from the date of change
b. The salvage value has been reduced to 6% of the asset’s original cost.

Compute for the December 31, 2020 carrying value of the asset and the depreciation
expense for the year under each of the following independent cases:

a. A change from straight-line depreciation to SYD method

b. A change from SYD method to double-declining balance method

PROBLEM 4: (ERROR CORRECTION)

You are auditing the financial statements of Brin Inc. for the year 2020. The details of the
unadjusted balances of its Accumulated Profit account are as follows:
ACCUMULATED PROFIT
Date Particulars Debit Credit Balance
01.01.2018 Beginning Balance 500,000
08.31.2018 Gain on sale of treasury shares 40,000 540,000
12.31.2018 Net income for the year 200,000 740,000
02.28.2019 Payment of dividends declared in 2018 70,000 670,000
05.31.2019 Paid in capital in excess of par 20,000 690,000
07.31.2019 Loss on sale of treasury shares 30,000 660,000
12.31.2019 Net loss for the year 80,000 580,000
12.31.2020 Net income for the year 150,000 730,000
12.31.2020 Payment of dividends declared in 2019 90,000 640,000

Your examination disclosed the following:

a. Omissions at the end of each year of the following:
2017 2018 2019 2020
Merchandise Inventory, end 4,000 7,000
Accrued Expense 3,000 5,000
b. The cost of major repairs on the company’s equipment on January 1, 2018 in the amount of
P150,000 was expensed outright. Remaining life of the equipment on January 1, 2018 was 6
years.

c. On January 1, 2019, the company paid an operating expense in the amount of P15,000
covering the period, 2019 to 2021. The company charged the entire payment as outright
expense and no adjusting journal entry was ever made pertinent to this transaction.

Compute for the following:

a. Accumulated profit as of December 31, 2018 and 2020
b. Profit (Loss) for the years ended December 31, 2018 and 2019

PROBLEM 5: (CASH/ACCRUAL; SINGLE ENTRY)

Toku Corp.’s operating expenses and interest income under cash basis amounted to P490,000 and
P710,000; respectively, for the year 2020. Further examination revealed the following information:
January 1, 2020 December 31, 2020
Accrued operating expenses P 121,000 P 135,000
Prepaid operating expenses 59,000 90,000
Accrued interest income 32,000 24,000
Unearned interest income 112,000 77,000

Compute for the following under the accrual basis:

a. Operating expenses for the year
b. Interest income for the year

Page 2 of 4 0915-2303213/0908-6567516  [email protected]

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1 & 2: ERROR CORRECTION, ACCOUNTING CHANGES, CASH-ACCRUAL & SINGLE ENTRY

PROBLEM 6: (CASH/ACCRUAL; SINGLE ENTRY)

Juris Corp. accounts for its sales under the cash basis. For the year 2020, the total collections from
customers, including cash sales made and recoveries of previously written-off accounts, based on
Julius Corp.’s cash receipts books amounted to P1,700,000. Audit investigation revealed the
following additional information:

Trade receivable, beginning P 190,000

Trade receivable, end 450,000
Advances from Customers, beginning 80,000
Advances from Customers, end 60,000
Sales discounts 20,000
Sales returns before collections were made as evidenced
by the issuances of credit memos 42,000
Sales returns after collections were made, thus cash refunds were given 18,000
Write-offs of worthless accounts receivable 22,000
Cash recoveries from accounts previously written-off 14,000

Compute for the Net Sales under the accrual basis of accounting.

PROBLEM 7: (CASH/ACCRUAL; SINGLE ENTRY)

Tin Corp., which maintains records under cash-basis, revealed total payments made to suppliers
amounting to P700,000. Additional information follow:

Trade payable, January 1, 2020 P 92,000

Trade payable, December 31, 2020 105,000
Advances to Suppliers, January 1, 2020 57,000
Advances to Suppliers, December 31, 2020 19,000
Merchandise inventories, January 1, 2020 186,000
Merchandise inventories, December 31, 2020 125,000
Purchase discounts 39,000
Purchase returns before any payments were made, thus credit
memos were received from suppliers 54,000
Purchase returns after payments were made, thus cash was
received from suppliers as refunds 16,000

Compute for the Cost of Goods Sold.

PROBLEM 8: (CASH/ACCRUAL; SINGLE ENTRY)

The Gian Co. began operations in 2019. During 2019, the bookkeeper used a check register to
record all cash receipts and cash disbursements. No other journals were used. The following is a
summary of the cash receipts and disbursements made during the year:

Cash receipts:
Sale of share capital P 90,000
Collections from customers 460,000
September 1, 2019, one-year, 12% loan 60,000
Total cash receipts P 610,000

Cash disbursements:
Payment of inventories P 230,000
Payment of salaries 80,000
Acquisition of equipment 90,000
Payment of rent 30,000
Miscellaneous expenses 11,000
Total cash disbursements P 441,000
Cash, End P 169,000

Page 3 of 4 0915-2303213/0908-6567516  [email protected]

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100
Weeks 1 & 2: ERROR CORRECTION, ACCOUNTING CHANGES, CASH-ACCRUAL & SINGLE ENTRY

The following additional information were gathered

a. Customers owed the company P56,000 at year end, P8,000 of which may probably not be
collected.
b. At year end, P70,000 was still due to suppliers of merchandise.
c. At year-end, merchandise inventory costing P24,000 still remained on hand.
d. Salaries owed to employees at year-end amounted to P13,000.
e. On November 1, 2019, P40,000 rent was paid representing rent for 6 months beginning
November 1, 2019.
f. The equipment, which has a 10-year life was purchased on January 1, 2019. Straight-line
depreciation is used.
Determine the adjusted balances of the following for the year ended/as of December
31, 2019:
a. Sales Revenue
b. Cost of Sales
c. Expenses
d. Total Current Assets
e. Total Non-current Assets
f. Total Current Liabilities

PROBLEM 9: (CASH/ACCRUAL; SINGLE ENTRY)

Your audit of Steph Corp. revealed that your client kept very limited records. All of the company’s
disbursements were made out of cash collections (coins and bills), but all purchases of merchandise
and acquisitions of equipment were paid through issuances of checks. No record was kept for the
cash in bank account, nor was a record kept for sales made. Accounts receivable were recorded
only by keeping copies of tickets. Copies of these tickets were released to the customers upon
collection of their accounts. The following information were obtained:

1. The company started its operations on January 2, 2019, on which date 216,000 ordinary
shares with a par value of P100 were issued in exchange for the following:

Cash P 1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000
2. An analysis of the bank statements showed total deposits of P12,600,000. Included in the
total deposits were cash proceeds from the sale of the share capital made on January 2, 2019
for P1,800,000. The bank statement balance on December 31, 2019 was P900,000.
3. There were company’s checks amounting to P180,000, which were dated and issued in
December 2019, but paid by the bank in January 2020. Cash on hand on December 31, 2019
amounted to P450,000, which is inclusive of advances from a customer in the amount of
P135,000.
4. During the year, the company borrowed P1,600,000 from the bank and repaid P400,000 in
principal and P80,000 in interest.
5. Disbursements made during the year, not through check issuances, but from cash receipts,
were as follows: Utilities of P360,000; Salaries of P360,000; Supplies of P720,000 and
Dividends of P540,000. There were neither accruals nor deferrals of expenses at the end of
the year.
6. An inventory of merchandise taken on December 31, 2019 showed P2,718,000 of
merchandise.
7. Accounts receivable at the end of the year totaled P3,240,000. Of this amount, P180,000 may
prove uncollectible.
8. Unpaid supplier invoices for merchandise purchased amounted to P1,260,000 at the end of
the year.
9. Equipment with a cash purchase price of P1,440,000 was purchased on January 2, 2019, on
an installment basis. During the year, the total checks issued for the total installment price of
the equipment totaled P1,602,000, which all cleared the bank during the year. The equipment
has a useful life of 10 years and is being depreciated under the straight-line method.

Compute for the profit under the accrual basis for the year ended December 31, 2019.

Page 4 of 4 0915-2303213/0908-6567516  [email protected]