Chapter 2

Chapter 2
Correction of Errors
Problem 1
Under(Over) statement in Profit of
Retained
Nature of error
Earnings
2012 Accounts Affected
01/01/12
Omission of prepaid
expenses
12/31/10
12/31/11
12/31/12
Omission of unearned
revenue:
12/31/10
12/31/11
12/31/12
Omission of accrued
expenses:
12/31/10
12/31/11
12/31/12
Omission of accrued
revenues
12/31/10
12/31/11
12/31/12
Net
under(over)statement
Reported profit(loss)
Corrected profit(loss)
2010
2011
29,000
(29,000)
30,000
(20,000)
(27,500)
42,500
24,000
300,000
324,000
2012
20,000
(28,000)
27,500
(25,000)
(42,500)
45,000
( 2,000)
(540,000)
(542,000)
(30,000)
34,000
28,000
(15,000)
25,000
(27,000)
(45,000)
41,000
11,000
250,000
251,000
Account
30,000
(28,000)
(25,000)
45,000
Dr.
Expenses
Prepaid expenses
Expenses
2. A
3. D
Expenses
Expenses
Accrued expenses
27,000
22,000
4. D
5. C
Problem 3
1.
2.
3.
4.
Retained Earnings
Wages Expense
160,000
Interest Income
Retained Earnings
48,000
Insurance Expense
Prepaid Insurance
Retained Earnings
18,000
18,000
Supplies Expense
Retained Earnings
25,000
160,000
48,000
36,000
13
34,000
15,000
Problem 2
1. A
30,000
34,000
Revenue
Revenue
Unearned revenue
Revenues
Accrued revenues
Revenues
25,000
Cr.
28,000
15,000
25,000
27,000
45,000
41,000
41,000
Chapter 2
5.
6.
7.
8.
Retained Earnings
Accumulated Amortization Development Cost
Capitalized Development Cost
Amortization Expense Development Cost
80,000
80,000
Retained Earnings
Service Revenue
Unearned Service Revenue
80,000
Retained Earnings
Rent Revenue
36,000
120,000
40,000
40,000
40,000
36,000
Office Equipment
Depreciation Expense - Equipment
Accumulated Depreciation
Retained Earnings
1,500,000
300,000
900,000
900,000
Problem 4
(Function of Expense Method)
1.
No entry, counterbalanced as of 12/31/11
2.
Retained Earnings
Cost of Sales
3.
Retained Earnings
Cost of Sales
4.
No entry ( no effect on cost of sales and profit of both 2011 and 2012; as both beginning inventory and purchases
in 2012 had been transferred to cost of sales)
5.
Cost of Sales
Retained Earnings
6.
Sales
Retained Earnings
(Nature of Expense Method)

1.
No entry, counterbalanced as of 12/31/11
2.
Retained Earnings
Inventory, beginning
3.
Retained Earnings
Purchases
4.
Purchases
5.
Retained Earnings
6.
Sales
Retained Earnings
14
Chapter 2
Problem 5 (Dragon Ball Company)
(1) Schedule to compute correct profit:
Under(over)statement in Profit
2010
2011
Omission of accrued wages
12/31/10
12/31/11
12/31/12
Omission of unused supplies
12/31/10
12/31/11
12/31/12
Omission of accrued interest income
12/31/10
Sale of equipment - Proceeds
Gain on sale
Recorded depreciation
Omission of unearned rent
Net under(over)statement
Reported Profit
Corrected Profit
(80,000)
32,000
80,000
(60,000)
(32,000)
25,000
18,000
(25,000)
7,000
4,200
(18,000)
(43,800)
450,000
406,200
(800)
290,000
289,200
4,200
(2) Audit adjusting entries:

Retained Earnings
Wages Expense
60,000
Wages Expense
Wages Payable
78,000
Supplies Expense
Retained Earnings
25,000
Unused Supplies
Supplies Expense
22,400
Retained Earnings
Equipment
Depreciation Expense
9,600
36,600
60,000
78,000
25,000
22,400
42,000
4,200
(3) Correcting entries in 2013

Retained Earnings
Wages Expense
78,000
Supplies Expense
Retained Earnings
22,400
Retained Earnings
Equipment
5,400
36,600
78,000
22,400
42,000
15
2012
RE, 1/1/12
60,000
(78,000)
(60,000)
(25,000)
22,400
25,000
4,200
(40,000)
(56,400)
440,000
383,600
(9,600)
(44,600)
Chapter 2
Problem 6 (Erasure Company)
1.
Retained Earnings
2.
No entry (counterbalanced)
3.
Loss on Damages
Retained Earnings
4.
5.
6.
16,500
585,000
585,000
Goodwill
12,000
Retained Earnings
(Note: Goodwill is not subject to amortization)
Retained Earnings
Sales
328,500
Retained Earnings
Equipment
18,000
2,000
Repairs and Maintenance

Equipment
30,000
8.
12,000
328,500
20.000
30,000
Accumulated Depreciation (10% x (20,000+ 30,000)

7.
5,500
11,000
5,000
5,000
Cost of Sales
Retained Earnings
21,000
Cost of Sales
Inventory
20,000
21,000
20,000
No entry ( no effect on cost of sales of 2011 and 2012; Cost of sales had been set up; both purchases and
beginning inventory for 2012 had been transferred to cost of sales)
Problem 7 (Gloria Company)

Audit adjustments to correct 2011 financial statements
Other operating income
Unearned commission income
Audit adjustments to correct 2012 financial statements
8,000
Prepaid rent
16,000
Selling and administrative expenses
8,000
16,000
Retained earnings
8,000
8,000

6,400
Unearned commission income
6,400

Retained earnings
16,000
16,000
Prepaid rent
21,000
16
21,000
Chapter 2
Interest receivable
8,000
8,000

Retained earnings
8,000
Interest receivable
Interest income
12,000
Sales
90,000
8,000
12,000
Advances from customers

Cost of sales
Accounts payable
15,000
Equipment
20,000

Accumulated depreciation
15,000
20,000
2,000
2,000
90,000
Retained earnings
Cost of sales
15,000
Equipment
Retained earnings
20,000

4,000
15,000
18,000
2,000
4,000
(a)
Gloria Company
Comparative Statements of Comprehensive Income
For the Years Ended December 31, 2012 and 2011
Sales
Cost of Sales
Gross Profit
Other Operating Income
Total Income
Less: Selling and Administrative Expenses
Net Income from Operations
Interest Expense
Net Income
P
P
P
P
P
(b) Effect on total assets, December 31, 2011 (see audit adjusting entries for 2011)
= 16,000 + 8,000 + 20,000 2,000 = P42,000 understated
(c) Effect on total assets, December 31, 2012 (see audit adjusting entries for 2012)
= 21,000 + 12,000 + 20,000 2,000 4,000 = P47,000 understated.
(d) Effect on total liabilities, December 31, 2012 (see audit adjusting entries for 2012)
= 6,400 + 90,000 = 96,400 understated
17
2012
910,000
585,000
325,000
73,600
398,600
279,000
119,600
80,000
39,600
P
P
P
P
P
2011
720,000
465,000
255,000
30,000
285,000
156,000
129,000
20,000
109,000
Chapter 2
Problem 8 Golden Crest
Particulars
Omission of unused supplies
12/31/11
12/31/12
Repairs charged to equipment on 1/1/10
AFS securities were measured at cost
Correct cost of equipment, P746,070
Recorded cost
900,000
Difference
153,930
Difference in depreciation
2011 153,930/10 x 3/12 = 3,848
2012 153,930 / 10
=15,393
Interest expense
2011 P255,393 x 3/12 =
Net under (overstatement)
2011 Profit
Retained earnings,
Dec. 31, 2011
15,000
15,000
(8,500)
(68,000)
Non- current
Assets, 12/31/12
Retained earnings
January 1, 2011
(59,500)
50,000
(76,500)
(153,930)
3,848
3,848
(63,848)
(53,500)
(63,848)
(113,000)
Present value of the note on October 1, 2011 = 300,000 x 2.4869 = 746,070

Amortization table for the note payable
Date
Periodic Payment
Applied to Interest
October 1, 2011
September 30, 2012
300,000
74,607
September 30, 2013
300,000
52,068
Problem 9 (Golden Harvest Corporation)
(a) Computation of correct profit (loss)
Particulars
Omissions of
Accrued expenses, 12/31/11
12/31/12
12/31/13
Accrued income
12/31/11
12/31/12
12/31/13
Prepaid expenses 12/31/11
12/31/12
12/31/13
Unearned income 12/31/11
12/31/12
12/31/13
Omission in the ending inventory
2012
2013
Machine charged to expense on August 31, 2011
Depreciation on the machine
Net understatement (overstatement)
Reported profit (loss)
Correct profit (loss)
Applied to Principal
225,393
247,932
2012
(20,000)
20,000
(25,000)
12,000
(15,000)
80,000
(3,333)
85,667
(250,000)
164,333
18
(144,182)
2011
32,000
Computation of retained earnings
3,848
15,393
(32,000)
30,000
(12,000)
18,000
15,000
(10,000)
(76,500)
Bal. of Principal
746,070
520,677
272,745
2013
25,000
(30,000)
(30,000)
26,000
(18,000)
24,000
10,000
(8,000)
28,000
(28,000)
64,000
(10,000)
22,000
320,000
342,000
(10,000)
25,000
380,000
405,000
Chapter 2
Balance, January 1
Profit (loss)
Dividends declared
Balance, December 31
2011
0
(164,333)
P(164,333)
2012
P(164,333)
342,000
(60,000)
P117,667
2013
P117,667
405,000
(100,000)
422,667
(b) 2013 Audit Adjusting Entries

Retained Earnings
Operating Expenses
25,000
Operating Expenses
Accrued Expenses
30,000
Income
Retained Earnings
30,000
Accrued Income
Income
26,000
Expenses
Retained Earnings
18,000
Prepaid Expenses
Expenses
24,000
Retained Earnings
Income
10,000
25,000
30,000
30,000
26,000
18,000
24,000
Income
Unearned Income
10,000
8,000
8,000
Inventory, beginning/Cost of Sales

Retained Earnings
28,000
Inventory, end
Income Summary/ Cost of Sales
64,000
Machinery
Operating Expenses
Retained Earnings
80,000
10,000
28,000
64,000
66,667
23,333
Problem 10 (Sukiyaki Corporation)

2011 Audit Adjustments to restate 2011 FS
Other Operating Expenses Unrealized

Loss on Trading Sec.
Held for Trading Equity Securities
Audit Adjustments to Restate 2012 FS

Allowance for Doubtful Accounts
5,000
Operating Expenses
32,000 37,000 = 5,000
3,000
3,000
19

7,000
Retained Earnings
3,000
Unrealized Gain on Trading Sec.
5,000
10,000
Chapter 2
Cost of Sales
Merchandise Inventory
8,900
8,900
Equipment
Operating Expenses
36,000
Operating Expenses
(36,000 -6,000)/10
3,000
36,000
3,000
Retained Earnings
Cost of Sales
8,900
Cost of Sales
13,600
Equipment
Retained Earnings
36,000
Retained Earnings
Operating Expenses
3,000
3,000
8,900
13,600
6,000
20,000
Equipment
Gain on Sale of Equipment
Prepaid Insurance
Operating Expenses
Retained Earnings
6,000
3,000
9,000
Prepaid Insurance
Operating Expenses
Retained Earnings
2012
P1,000,000
434,700
P 565,300
3,000
10,000
578,300
(351,000)
P227,300
Current Assets
Cash
Accounts Receivable, net
Prepaid Expenses
Total Current Assets
Non-Current Assets
Property, Plant and Equipment, net of Acc. Deprn
Total Assets
20
3,000
6,000
2011
P900,000
403,900
P 496,100
________
496,100
(280,000)
(3,000)
P 213,100
Sukiyaki Corporation
Statement of Financial Position
December 31, 2012 and 211
2012
17,000
3,000
3,000
Sukiyaki Corporation
Statement of Comprehensive Income
For the Years Ended December 31, 2012 and 2011
Sales
Cost of Sales
Gross Profit
Gain on Sale of Equipment
Unrealized Gain on Trading Securities
Total Income
Operating Expenses
Unrealized Loss on Trading Securities
Profit
36,000
2011
P183,000
85,000
360,000
193,400
3,000
P 824,400
P 2,000
75,000
278,000
193,100
6,000
P554,100
P 78,400
P902,800
P 96,100
P650,200
Chapter 2
Current Liabilities
Accounts Payable
P121,400
P196,100
Shareholders Equity
Ordinary Share
Share Premium
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity
P260,000
20,000
501,400
P781,400
P902,800
P180,000
0
274,100
P 454,100
P650,200
Cash Flow Statement

For the Year Ended December 31, 2012
Cash Flow From Operating Activities
Collection from customers
Payment to Suppliers
Payment for expenses
Net cash flow from operations
Cash Flow From Investing Activities
Sale of equipment
Purchase of equipment
Net cash flow from investing activities
Cash Flow From Financing Activities
Issue of ordinary share (80,000 + 20,000)
Increase in cash
Cash Balance, January 1, 2007
Cash Balance, December 31
P904,000
(509,700)
(315,800)
P78,500
P 3,000
( 500)
2,500
100,000
P181,000
2,000
P183,000
Computations:
Accounts Receivable
Allowance for Uncollectible Accounts
AR, Net
2012
P392,000
32,000
P360,000
2011
P296,000
18,000
P278,000
Property, Plant and Equipment

Cost
Carrying value
P186,000
107,600
P 78,400
P205,500
109,400
P 96,100
Accounts Receivable, beg.

Sales
Accounts Receivable, end
Collections from customers
P296,000
1,000,000
(392,000)
P904,000
Inventory, end
Cost of sales
Inventory, beg.
Purchases
Accounts Payable, beginning
Accounts Payable, end
Payment to suppliers
P193,400
434,700
(193,400)
P434,700
196,100
(121,400)
P509,700
21
Chapter 2
Accumulated depreciation, end
Accumulated depreciation of equipment sold
Accumulated depreciation, beg.
Depreciation expense
P107,600
20,000
(109,400)
P18,200
Operating expenses
Depreciation
Doubtful accounts expense 32,000 18,000
Decrease in prepaid expenses
Operating expenses paid
P351,000
( 18,200)
( 14,000)
( 3,000)
P315,800
Property, Plant and Equipment, cost, end

Cost of equipment sold
Property, plant and equipment, cost, beg.
Equipment purchased
P186,000
20,000
(205,500)
P 500
Problem 11 (Tahoma Corporation)

Adjusting Entries December 31, 2012
Sales
100,000
Retained Earnings
100,000
Accounts Receivable
Sales
250,000
Retained Earnings
Purchases
175,000
Purchases
Accounts Payable
140,000
Sales
250,000
175,000
140,000
20,000
Unearned Revenue
Retained Earnings
Expenses
20,000
35,000
35,000
Expenses
Accrued Expenses
50,000
Retained Earnings
75,000
Inventory, end
Income Summary
110,000
50,000
75,000
110,000
Advances to Suppliers
Purchases
50,000
50,000
Retained Earnings
Expenses
Accumulated Depreciation Printing Equipment
3,333
10,000
13,333
22
Chapter 2
Expenses
Retained Earnings
Accumulated Depreciation Building
37,500
12,500
Expenses
Allowance for Uncollectible Accounts
25,000
50,000
25,000
Interest Expense (500,000 x 12% x 8/12)

40,000
Retained Earnings (500,000 x 12% x 4/12)
20,000
Operating Expenses
60,000
(Note: 2 semi-annual payments were made in 2012; both were charged to operating expenses, balance of Mortgage
payable before the annual payment in August 2012 is 450,000 + 50,000)
Interest Expense
Interest Payable
450,000 x 12% x 4/12
18,000
18,000
Tahoma Company
Statement of Comprehensive Income
For the Year Ended December 31, 2012
Sales
Cost of Sales
Inventory, January 1
Purchases
Inventory, Dec. 31
Cost of Sales
Gross Profit
Selling and Administrative Expenses
Profit before interest expense
Interest expense
Profit
P 2,180,000
75,000
915,000
(110,000)
880,000
1,250,000
777,500
472,500
58,000
414,500
Tahoma Company
Statement of Financial Position
December 31, 2012
Assets
Current Assets
Cash
Accounts receivable, net of allowance for uncollectible accounts of P25,000
Advances to suppliers
Inventory
Total current assets
Non-current assets
Land
Building, net of P50,000 accumulated depreciation
Printing equipment, net of P13,333 accumulated depreciation
Total property, plant and equipment
Total assets
23
P 750,000
225,000
50,000
110,000
P1,135,000
P 400,000
700,000
86,667
P1,186,667
P2,321,667
Chapter 2
Liabilities and Shareholders Equity
Current Liabilities
Accounts payable
Accrued expenses
Current portion of mortgage payable
Interest payable
Unearned revenue
Total current liabilities
P 140,000
50,000
50,000
18,000
20,000
P278,000
Non-current liabilities
Mortgage payable, net of current portion
Total liabilities
P 400,000
P 678,000
Shareholders Equity
Ordinary share capital
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity
P 1,000,000
*643,667
P 1,643,667
P2,321,667
*Retained earnings, January 1, 2012 before adjustment

Correction of prior period errors
Profit for 2012
Retained earnings, December 31, 2012
P 300,000
( 70,833)
414,500
P 643,667
Multiple Choice
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13..
14.
15.
A
C
A
A
B
A
A
B
B
D
B
B
C
B
A
16.
17.
18.
19
20.
D
C
C
A
700,000 + 29,000 33,000 15,000 22,000+ 18,000

-33,000 15,000 15,000 + 18,000 = ( 45,000 )
- 29,000 15,000 + 22,000 = (22,000)
5,000,000 + 200,000 250,000 300,000 + 100,000 = 4,750,000
(300,000) + (50,000) + 100,000 = (250,000)
- 16,000 15,000 10,000 + 10,800 = (30,200)
- 15,000 + 10,800 = (4,200)
5,000,000 200,000 150,000 = 4,650,000
2,500,000 1,000,000 + 1,500,000 500,000 200,000 + 600,000 = 2,900,000
1,500,000 + 600,000 = 2,100,000
1,000,000 + 500,000 + 200,000 = 1,700,000
200,000 / 5
155,000 + 1,000 8,000 + 12,000 5,500 10,000 = 144,500
3,000,000 400,000 = 2,600,000
Profit is understated by 7,000 + 3,000; RE is understated by P3,000; P7,000 has been
counterbalanced.
50,400 / 9 = 5,600
54,000 11,200 = 42,800
400,000 + 300,000 + 500,000 350,000 = 850,000 net overstatement
-300,000 500,000 + 200,000 = 600,000 overstated
24

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2012 Accounts Affected

(Nature of Expense Method)

(2) Audit adjusting entries:

(3) Correcting entries in 2013

Repairs and Maintenance

Accumulated Depreciation (10% x (20,000+ 30,000)

Problem 7 (Gloria Company)

Audit adjustments to correct 2012 financial statements

Other operating income

Selling and administrative expenses

Other operating income

Advances from customers

Selling and administrative expenses

Selling and administrative expenses

Present value of the note on October 1, 2011 = 300,000 x 2.4869 = 746,070

Computation of retained earnings

(b) 2013 Audit Adjusting Entries

Inventory, beginning/Cost of Sales

Problem 10 (Sukiyaki Corporation)

Other Operating Expenses Unrealized

Audit Adjustments to Restate 2012 FS

Held for Trading Equity Securities

Cash Flow Statement

Property, Plant and Equipment

Accounts Receivable, beg.

Property, Plant and Equipment, cost, end

Problem 11 (Tahoma Corporation)

Interest Expense (500,000 x 12% x 8/12)

*Retained earnings, January 1, 2012 before adjustment

700,000 + 29,000 33,000 15,000 22,000+ 18,000

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