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2.

0 Financial Accounting and Reporting - Error Correction (Difficult)


Question #2
You are performing, for the first time, the audit for the year ended December 31,
2013 of Norman Corp. financial statements. The company reported the following
amounts of net income for the years ended December 31, 2011, 2012, and 2013:
2011
381,000
2012
450,000
2013
385,500
During your examination, you discovered the following errors:
You observed that there were errors in the physical count: December 31, 2012
inventories were understated by 42,000 and December 31, 2013 were overstated by
69,000.
On December 30, 2013 Norman recorded on account, merchandise in transit
which cost 45,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.
Accrual sales at each year end were consistently omitted as follows:
2011
12, 000
2012
15,000
2013
10,500
Accrual of salaries were consistently omitted as follows:
.
December 31, 2011
30,000
December 31, 2012
42,000
On March 5, 2012, a 10%stock dividend was declared and distributed. The par
value of the shares amounted to 30,000 and market value was 39,000. The stock
dividend was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
On July 1, 2012, Norman paid a 3-year rent. The 3-year premium of 18,000 was
paid on that date, and the entire premium was recorded as insurance expense.
On January 1, 2013, Norman retired bonds with a book value of 360,000 for
318,000. The gain was deferred and amortized over 10 years as a reduction of interest
expense on other outstanding bonds.
What is the correct net income in 2012?
498,000
534,000
528,000
477,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #3
When an accounting error is being corrected, the Company should the disclose
the following except:
The amount of the correction for each prior period presented.
That comparative information has been restated, or that the restatement for a
particular prior period has not been made because it would require undue cost.
The nature of the error
The effect of the restatement on each line item in the financial statements.
SOLUTION:
When an accounting error is being corrected, the reporting entity is to disclose
the following:
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #4
An examination of the accounting records of Ben Inc. for the year ended
December 31, 2013 indicates that several errors were made. The following errors were
discovered:
The footings and extensions showed that the inventory on December 31, 2012
was understated by 380,000
300,000 worth of inventories were received on January 2, 2014. Upon
investigation you discovered that these goods were shipped by the supplier on
December 30, 2013 FOB Shipping point. Further investigation revealed that liability on
item were recorded when the goods were shipped.
Salary accruals on December 31, were consistently omitted:
2010
190,000
2011
220,000
2012
200,000
2013
280,000
Unused supplies were consistently omitted at the end of each year
2010
150,000
2011
200,000
2012
230,000
2013
240,000
A 4-year fire insurance amounting to 300,000 was paid and fully expense on June
15, 2011. The insurance covers the fiscal year July 1 to June 30.
Interest receivable were not recorded on December 31 of the following years:
2011
40,000
2012
50,000
2013
60,000
On January 1, 2013 an equipment costing 800,000 was sold for 440,000. At the
end of the sale the equipment had accumulated depreciation of 480,000. The cash
received was recorded by the company as miscellaneous income.
You also discovered that on July 1, 2011, the company completed the
construction of the left wing of its factory building incurring a total cost of 1,400,000,
which it had charged to repairs expense. The said building has been used in operations
for 5 years as of july 1, 6,000,000 had a carrying value of 2,250,000 as of December 31,
2013.
The income statements of Ben Inc. indicate the following net income:
2011
3,000,000
2012
3,500,000
2013
4,000,000
What is the correct net income in 2011?
4,622,500
4,422,500
4,385,000
4,585,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #5
De Leon Inc. is a calendar year corporation. Its financial statements for the years
2012 and 2013 contained errors as follows.
2012
2013
Ending inventory
1,000 understated
3,000 overstated
Depreciation expense
800 understated
2,500 overstated
Assumed that no correcting entries were made at December 31, 2012 or
December 31, 2013 and that no additional errors occurred in 2013. Ignoring income
taxes, by how much will working capital at December 31, 2013 be overstated or
understated?
1,000 understated
3,000 overstated
500 overstated
1,700 understated
CCDAB
Question #1
An examination of the accounting records of Ben Inc. for the year ended
December 31, 2013 indicates that several errors were made. The following errors were
discovered:
The footings and extensions showed that the inventory on December 31, 2012
was understated by 380,000
300,000 worth of inventories were received on January 2, 2014. Upon
investigation you discovered that these goods were shipped by the supplier on
December 30, 2013 FOB Shipping point. Further investigation revealed that liability on
item were recorded when the goods were shipped.
Salary accruals on December 31, were consistently omitted:
2010
190,000
2011
220,000
2012
200,000
2013 2013
280,000
Unused supplies were consistently omitted at the end of each year
2010
150,000
2011
200,000
2012
230,000
2013
240,000
A 4-year fire insurance amounting to 300,000 was paid and fully expense on June
15, 2011. The insurance covers the fiscal year July 1 to June 30.
Interest receivable were not recorded on December 31 of the following years:
2011
40,000
2012
50,000
2013
60,000
On January 1, 2013 an equipment costing 800,000 was sold for 440,000. At the
end of the sale the equipment had accumulated depreciation of 480,000. The cash
received was recorded by the company as miscellaneous income.
You also discovered that on July 1, 2011, the company completed the
construction of the left wing of its factory building incurring a total cost of 1,400,000,
which it had charged to repairs expense. The said building has been used in operations
for 5 years as of july 1, 6,000,000 had a carrying value of 2,250,000 as of December 31,
2013.
The income statements of Ben Inc. indicate the following net income:
2011
3,000,000
2012
3,500,000
2013
4,000,000
What is the correct net income in 2011?
4,422,500
4,385,000
4,585,000
4,622,500
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #2
De Leon Inc. is a calendar year corporation. Its financial statements for the years
2012 and 2013 contained errors as follows.
2012
2013
Ending inventory
1,000 understated
3,000 overstated
Depreciation expense
Depreciation expense
800 understated
2,500 overstated
Assumed that no correcting entries were made at December 31, 2012. Ignoring
income taxes, by how much will retained earnings at December 31, 2013 be overstated
or understated?
2,700 understated
1,300 overstated
500 overstated
3,200 understated
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #3
You are auditing the financial statements of More Luck Co. the companys
accountant provided you with the following comparative statements of income and
accumulated profits for the years 2012 and 2013.
2013
2012
Sales
4,500,000
6,000,000
Cost of goods sold
(2,800,000)
(2,400,000)
Gross income
3,200,000
2,100,000
Operating expenses
(1,500,000)
(1,800,000)
Net profit
1,700,000
300,000
Accumulated profits, beg
1,150,000
1,000,000
Net profit
1,700,000
300,000
Dividends paid
(500,000)
(150,000)
Accumulated profits, end
2,350,000
1,150,000
Audit notes:
The ending inventory for 2012 was understated by 100,000.
The company decided to change its method of depreciation from the double-
declining balance method to the straight-line. The depreciable assets had a 10 year
useful life and is 50% depreciated as at the end of 2012. The salvage value of the said
assets was estimated to be 50,000. Expenses in the income statements included a
350,000 depreciation expense computed based on double-declining balance method.
balance method.
On August 31, 2012, the company started the construction of a building it plans to
use as a second factory. As of the current balance sheet, the construction is yet to be
finished. Total accumulated costs incurred on the construction and recorded in its
construction-in-progress account, amounted to 1,250,000, which included a 25,000
capitalized borrowing cost in 2012, since the company opted to apply the alternative
approach of accounting for finance cost in accordance with PAS 23. During the current
year, the company decided to change the method of accounting for borrowing cost to
follow the benchmark treatment. Actual borrowing cost in 2013 amounted to 75,000 it
charged to current operations.
What is the correct net income in 2012?
200,000
400,000
275,000
300,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #4
An examination of the accounting records of Ben Inc. for the year ended
December 31, 2013 indicates that several errors were made. The following errors were
discovered:
The footings and extensions showed that the inventory on December 31, 2012
was understated by 380,000
300,000 worth of inventories were received on January 2, 2014. Upon
investigation you discovered that these goods were shipped by the supplier on
December 30, 2013 FOB Shipping point. Further investigation revealed that liability on
item were recorded when the goods were shipped.
Salary accruals on December 31, were consistently omitted:
2010
190,000
2011
220,000
2012
200,000
2013
280,000
Unused supplies were consistently omitted at the end of each year
2010
150,000
2011
200,000
2012
230,000
2013
240,000
A 4-year fire insurance amounting to 300,000 was paid and fully expense on June
15, 2011. The insurance covers the fiscal year July 1 to June 30.
Interest receivable were not recorded on December 31 of the following years:
2011
40,000
2012
50,000
2013
60,000
On January 1, 2013 an equipment costing 800,000 was sold for 440,000. At the
end of the sale the equipment had accumulated depreciation of 480,000. The cash
received was recorded by the company as miscellaneous income.
You also discovered that on July 1, 2011, the company completed the
construction of the left wing of its factory building incurring a total cost of 1,400,000,
which it had charged to repairs expense. The said building has been used in operations
for 5 years as of july 1, 6,000,000 had a carrying value of 2,250,000 as of December 31,
2013. expense. The said building has been used in operations for 5 years as of july 1,
6,000,000 had a carrying value of 2,250,000 as of December 31, 2013.
The income statements of Ben Inc. indicate the following net income:
2011
3,000,000
2012
3,500,000
2013
4,000,000
What is the correct net income in 2013?
3,165,000
2,665,000
2,500,000
2,965,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #5
You are performing, for the first time, the audit for the year ended December 31,
2013 of Norman Corp. financial statements. The company reported the following
amounts of net income for the years ended December 31, 2011, 2012, and 2013:
2011
381,000
2012
450,000
2013
385,500
During your examination, you discovered the following errors:
You observed that there were errors in the physical count: December 31, 2012
inventories were understated by 42,000 and December 31, 2013 were overstated by
69,000.
On December 30, 2013 Norman recorded on account, merchandise in transit
which cost 45,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.
Accrual sales at each year end were consistently omitted as follows:
2011
12, 000
2012
15,000
2013
10,500
Accrual of salaries were consistently omitted as follows:
.
December 31, 2011
30,000
December 31, 2012
42,000
On March 5, 2012, a 10%stock dividend was declared and distributed. The par
value of the shares amounted to 30,000 and market value was 39,000. The stock
dividend was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
On July 1, 2012, Norman paid a 3-year rent. The 3-year premium of 18,000 was
paid on that date, and the entire premium was recorded as insurance expense. On
July 1, 2012, Norman paid a 3-year rent. The 3-year premium of 18,000 was paid on that
date, and the entire premium was recorded as insurance expense.
On January 1, 2013, Norman retired bonds with a book value of 360,000 for
318,000. The gain was deferred and amortized over 10 years as a reduction of interest
expense on other outstanding bonds.
What is the correct net income in 2012?
534,000
477,000
528,000
498,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #6
You are auditing the financial statements of More Luck Co. the companys
accountant provided you with the following comparative statements of income and
accumulated profits for the years 2012 and 2013.
2013
2012
Sales
4,500,000
6,000,000
Cost of goods sold
(2,800,000)
(2,400,000)
Gross income
3,200,000
2,100,000
Operating expenses
(1,500,000)
(1,800,000)
Net profit
1,700,000
300,000
Accumulated profits, beg
1,150,000
1,000,000
Net profit
1,700,000
300,000
Dividends paid
(500,000)
(150,000)
Accumulated profits, end
2,350,000
1,150,000
Audit notes:
The ending inventory for 2012 was understated by 100,000.
The company decided to change its method of depreciation from the double-
declining balance method to the straight-line. The depreciable assets had a 10 year
useful life and is 50% depreciated as at the end of 2012. The salvage value of the said
assets was estimated to be 50,000. Expenses in the income statements included a
350,000 depreciation expense computed based on double-declining balance method.
balance method.
On August 31, 2012, the company started the construction of a building it plans to
use as a second factory. As of the current balance sheet, the construction is yet to be
finished. Total accumulated costs incurred on the construction and recorded in its
construction-in-progress account, amounted to 1,250,000, which included a 25,000
capitalized borrowing cost in 2012, since the company opted to apply the alternative
approach of accounting for finance cost in accordance with PAS 23. During the current
year, the company decided to change the method of accounting for borrowing cost to
follow the benchmark treatment. Actual borrowing cost in 2013 amounted to 75,000 it
charged to current operations.
What is the correct net income in 2013?
1,685,000
1,610,000
1,715,000
1,675,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #7
Correcting the recognition, measurement and disclosure of amounts of financial
statement elements as if a prior period error had never occurred is known as:
retrospective restatement.
prior period application.
historical restatement.
retrospective application.
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #8
You are auditing the financial statements of More Luck Co. the companys
accountant provided you with the following comparative statements of income and
accumulated profits for the years 2012 and 2013.
2013
2012
Sales
4,500,000
6,000,000
Cost of goods sold
(2,800,000)
(2,400,000)
Gross income
3,200,000
2,100,000
Operating expenses
(1,500,000)
(1,800,000)
Net profit
1,700,000
300,000
Accumulated profits, beg
1,150,000
1,000,000
Net profit
1,700,000
300,000
Dividends paid
(500,000)
(150,000) (150,000)
Accumulated profits, end
2,350,000
1,150,000
Audit notes:
The ending inventory for 2012 was understated by 100,000.
The company decided to change its method of depreciation from the double-
declining balance method to the straight-line. The depreciable assets had a 10 year
useful life and is 50% depreciated as at the end of 2012. The salvage value of the said
assets was estimated to be 50,000. Expenses in the income statements included a
350,000 depreciation expense computed based on double-declining balance method.
On August 31, 2012, the company started the construction of a building it plans to
use as a second factory. As of the current balance sheet, the construction is yet to be
finished. Total accumulated costs incurred on the construction and recorded in its
construction-in-progress account, amounted to 1,250,000, which included a 25,000
capitalized borrowing cost in 2012, since the company opted to apply the alternative
approach of accounting for finance cost in accordance with PAS 23. During the current
year, the company decided to change the method of accounting for borrowing cost to
follow the benchmark treatment. Actual borrowing cost in 2013 amounted to 75,000 it
charged to current operations.
What is the adjusted accumulated profits at the end of 2013?
2,385,000
2,835,000
2,885,000
2,335,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #9
You are performing, for the first time, the audit for the year ended December 31,
2013 of Norman Corp. financial statements. The company reported the following
amounts of net income for the years ended December 31, 2011, 2012, and 2013:
2011
381,000
2012
450,000
2013
385,500
During your examination, you discovered the following errors:
You observed that there were errors in the physical count: December 31, 2012
inventories were understated by 42,000 and December 31, 2013 were overstated by
69,000.
On December 30, 2013 Norman recorded on account, merchandise in transit
which cost 45,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.
Accrual sales at each year end were consistently omitted as follows:
2011
12, 000
2012
15,000
2013
10,500
Accrual of salaries were consistently omitted as follows:
.
December 31, 2011
30,000
December 31, 2012
42,000
On March 5, 2012, a 10%stock dividend was declared and distributed. The par
value of the shares amounted to 30,000 and market value was 39,000. The stock
dividend was recorded as follows: 450,000
2013
385,500
During your examination, you discovered the following errors:
You observed that there were errors in the physical count: December 31, 2012
inventories were understated by 42,000 and December 31, 2013 were overstated by
69,000.
On December 30, 2013 Norman recorded on account, merchandise in transit
which cost 45,000. The merchandise was shipped FOB Destination and had not arrived
by December 31. The merchandise was not included in the ending inventory.
Accrual sales at each year end were consistently omitted as follows:
2011
12, 000
2012
15,000
2013
10,500
Accrual of salaries were consistently omitted as follows:
.
December 31, 2011
30,000
December 31, 2012
42,000
On March 5, 2012, a 10%stock dividend was declared and distributed. The par
value of the shares amounted to 30,000 and market value was 39,000. The stock
dividend was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
On July 1, 2012, Norman paid a 3-year rent. The 3-year premium of 18,000 was
paid on that date, and the entire premium was recorded as insurance expense.
On January 1, 2013, Norman retired bonds with a book value of 360,000 for
318,000. The gain was deferred and amortized over 10 years as a reduction of interest
expense on other outstanding bonds.
What is the correct net income in 2013?
418,800
313,200
388,800
393,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #13
An examination of the accounting records of Ben Inc. for the year ended
December 31, 2013 indicates that several errors were made. The following errors were
discovered:
The footings and extensions showed that the inventory on December 31, 2012
was understated by 380,000
300,000 worth of inventories were received on January 2, 2014. Upon
investigation you discovered that these goods were shipped by the supplier on
December 30, 2013 FOB Shipping point. Further investigation revealed that liability on
item were recorded when the goods were shipped.
Salary accruals on December 31, were consistently omitted:
2010
190,000
2011
220,000
2012
200,000 200,000
2013
280,000
Unused supplies were consistently omitted at the end of each year
2010
150,000
2011
200,000
2012
230,000
2013
240,000
A 4-year fire insurance amounting to 300,000 was paid and fully expense on June
15, 2011. The insurance covers the fiscal year July 1 to June 30.
Interest receivable were not recorded on December 31 of the following years:
2011
40,000
2012
50,000
2013
60,000
On January 1, 2013 an equipment costing 800,000 was sold for 440,000. At the
end of the sale the equipment had accumulated depreciation of 480,000. The cash
received was recorded by the company as miscellaneous income.
You also discovered that on July 1, 2011, the company completed the
construction of the left wing of its factory building incurring a total cost of 1,400,000,
which it had charged to repairs expense. The said building has been used in operations
for 5 years as of july 1, 6,000,000 had a carrying value of 2,250,000 as of December 31,
2013.
The income statements of Ben Inc. indicate the following net income:
2011
3,000,000
2012
3,500,000
2013
4,000,000
What is the effect of the errors to the 2013 working capital?
712,500 under
712,500 over
432,500 over
432,500 under
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #14
Which of the following statement is correct?
Materiality only depends only ever depends on the size of an item.
Extensive guidance is given in accounting standards on the concept of materiality.
The disclosure provisions of accounting standards do not need to be applied if the
resulting information is immaterial.
The disclosure provisions of accounting standards must always be applied even if
the resulting information is immaterial.
2.0 Financial Accounting and Reporting - Error Correction (Difficult) On March 5,
2012, a 10%stock dividend was declared and distributed. The par value of the shares
amounted to 30,000 and market value was 39,000. The stock dividend was recorded as
follows:
Other expense 30,000
Ordinary shares 30,000
On July 1, 2012, Norman paid a 3-year rent. The 3-year premium of 18,000 was
paid on that date, and the entire premium was recorded as insurance expense.
On January 1, 2013, Norman retired bonds with a book value of 360,000 for
318,000. The gain was deferred and amortized over 10 years as a reduction of interest
expense on other outstanding bonds.
What is the correct net income in 2011?
339,000
363,000
351,000
399,000
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #17
An examination of the accounting records of Ben Inc. for the year ended
December 31, 2013 indicates that several errors were made. The following errors were
discovered:
The footings and extensions showed that the inventory on December 31, 2012
was understated by 380,000
300,000 worth of inventories were received on January 2, 2014. Upon
investigation you discovered that these goods were shipped by the supplier on
December 30, 2013 FOB Shipping point. Further investigation revealed that liability on
item were recorded when the goods were shipped.
Salary accruals on December 31, were consistently omitted:
2010
190,000
2011
220,000
2012
200,000
2013
280,000
Unused supplies were consistently omitted at the end of each year
2010
150,000
2011
200,000
2012
230,000
2013
240,000
A 4-year fire insurance amounting to 300,000 was paid and fully expense on June
15, 2011. The insurance covers the fiscal year July 1 to June 30.
Interest receivable were not recorded on December 31 of the following years:
2011
40,000
2012
50,000
2013
60,000
On January 1, 2013 an equipment costing 800,000 was sold for 440,000. At the
end of the sale the equipment had accumulated depreciation of 480,000. The cash
received was recorded by theexpense. The said building has been used in operations for
5 years as of july 1, 6,000,000 had a carrying value of 2,250,000 as of December 31,
2013.
The income statements of Ben Inc. indicate the following net income:
2011
3,000,000
2012
3,500,000
2013
4,000,000
What is the effect of the errors to the 2013 retained earnings?
712,500 under
742,500 over
712,500 over
742,500 under
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #18
De Leon Inc. is a calendar year corporation. Its financial statements for the years
2012 and 2013 contained errors as follows.
2012
2013
Ending inventory
1,000 understated
3,000 overstated
Depreciation expense
800 understated
2,500 overstated
Assumed that no correcting entries were made at December 31, 2012. By how
much will 2012 income before income taxes be overstated or understated
500 overstated
3,200 understated
200 understated
2,700 understated
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #19
When it is impracticable to determine the effect of an error for all periods, the
entity
Restates comparative information retrospectively from the earliest date
practicable
Restates comparative information retrospectively up to the latest date practicable
Restates comparative information prospectively from the earliest date practicable
Restates comparative information prospectively up to the latest date practicable
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
Question #20
When an accounting error is being corrected, the Company should the disclose
the following except:
That comparative information has been restated, or that the restatement for a
particular prior period has not been made because it would require undue cost.
The amount of the correction for each prior period presented.
The effect of the restatement on each line item in the financial statements.
The nature of the error The nature of the error
SOLUTION:
When an accounting error is being corrected, the reporting entity is to disclose
the following:
2.0 Financial Accounting and Reporting - Error Correction (Difficult)
DBBDCBADCDCCDCABACAC
Question #1
Nando Co. purchased machinery that cost P810,000 on January 4, 2011. The
entire cost was recorded as an expense. The machinery has a nine-year life and a
P54,000 residual value. The error was discovered on December 20, 2013. Ignore income
tax considerations.
Nando's income statement for the year ended December 31, 2013, should show
the cumulative effect of this error in the amount of
0
558,000
726,000
642,000
SOLUTION:
CE = P0, correction of error
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #2
Errors can occur for which of the following reasons?
Fraud
Mistakes in applying accounting policies
Misinterpretation of facts
All of the answers are errors.
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #3
Gab Company purchased equipment that cost P750,000 on January 1, 2012. The
entire cost was recorded as an expense. The equipment had a nine-year life and a
P30,000 residual value. Gab uses the straight-line method to account for depreciation
expense. The error was discovered on December 10, 2014. Gab is subject to a 40 % tax
rate.
Gabs net income for the year ended December 31, 2012, was understated by
750,000
402,000
450,000
670,000
SOLUTION:
(P750,000 - [(P750,000 P30,000) 9]) (1 - .40) = P402,000.
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #4
Which among the following errors could cause an understatement of owners'
equity and overstatement of liabilities?
Failure to record the earned portion of fees received in advance
Failure to record interest accrued on a note payable
Making the adjusting entry for depreciation expense twice
Failure to make the adjusting entry to record revenue which had been earned but
not yet billed to customers
2.0 Financial Accounting and Reporting - Error Correction (Easy) 2.0 Financial
Accounting and Reporting - Error Correction (Easy)
Question #5
Counterbalancing errors do not include
an understatement of purchases
errors that correct themselves in three years
an overstatement of unearned revenue
errors that correct themselves in two years
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #6
If, at the end of a period, a company erroneously excluded some goods from its
ending inventory and also erroneously did not record the purchase of these goods in its
accounting records, these errors would cause
the ending inventory and retained earnings to be understated
no effect on net income, working capital, and retained earnings
cost of goods sold and net income to be understated
the ending inventory, cost of goods sold, and retained earnings to be understated
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #7
Josh Company's December 31 year-end financial statements contained the
following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
P7,500 understated
P11,000 overstated
Depreciation expense
2,000 understated
An insurance premium of P18,000 was prepaid in 2010 covering the years 2010,
2011, and 2012. The prepayment was recorded with a debit to insurance expense. In
addition, on December 31, 2011, fully depreciated machinery was sold for P9,500 cash,
but the sale was not recorded until 2012. There were no other errors during 2011 or
2012 and no corrections have been made for any of the errors. Ignore income tax
considerations.
What is the total net effect of the errors on Josh's 2011 net income?
Net income overstated by P13,000
Net income understated by P14,500
Net income overstated by P7,500
Net income overstated by P15,000
SOLUTION:
P7,500 (o) + P11,000 (o) + P6,000 (o) P9,500 (u) = P15,000 (o)
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #8
Which of the following could result in overstatement of both current assets and
shareholders' equity?
Holiday pay expense for administrative employees is misclassified as factory
overhead
An understatement of accrued sales commission
Annual depreciation on manufacturing machinery is understated
Noncurrent note receivable principal is misclassified as current asset
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #9
Josh Company's December 31 year-end financial statements contained the
following errors: Josh Company's December 31 year-end financial statements
contained the following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
P7,500 understated
P11,000 overstated
Depreciation expense
2,000 understated
An insurance premium of P18,000 was prepaid in 2010 covering the years 2010,
2011, and 2012. The prepayment was recorded with a debit to insurance expense. In
addition, on December 31, 2011, fully depreciated machinery was sold for P9,500 cash,
but the sale was not recorded until 2012. There were no other errors during 2011 or
2012 and no corrections have been made for any of the errors. Ignore income tax
considerations.
What is the total net effect of the errors on Josh's 2011 net income?
Net income overstated by P15,000
Net income overstated by P7,500
Net income understated by P14,500
Net income overstated by P13,000
SOLUTION:
P7,500 (o) + P11,000 (o) + P6,000 (o) P9,500 (u) = P15,000 (o)
2.0 Financial Accounting and Reporting - Error Correction (Easy)
Question #10
Accrued salaries payable of P51,000 were not recorded at December 31, 2010.
Office supplies on hand of P24,000 at December 31, 2011 were erroneously treated as
expense instead of supplies inventory. Neither of these errors was discovered nor
corrected. The effect of these two errors would cause
2011 net income to be understated P75,000 and December 31, 2011 retained
earnings to be understated P24,000
2010 net income and December 31, 2010 retained earnings to be understated
P51,000 each
2011 net income and December 31, 2011 retained earnings to be understated
P24,000 each
2010 net income to be overstated P27,000 and 2011 net income to be
understated P24,000
SOLUTION:
2011 NI = P51,000 (u) + P24,000 (u) = P75,000 (u). 2011 RE = P24,000 (u) [The
2010 P51,000 (o) is offset by 2011 P51,000 (u)].
2.0 Financial Accounting and Reporting - Error Correction (Easy)
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Question #1
The correction of a material error that occurred in a previous period must be
accounted for by:
a retrospective restatement in the first financial statements issued after the
discovery of the error.
a prospective adjustment to the financial statements.
an adjustment in future accounting periods.
disclosure in the notes to the financial statements.
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #2
Kristine, Inc. is a calendar-year corporation whose financial statements for 2012
and 2013 included errors as follows:
Year
Ending Inventory Ending Inventory
Depreciation Expense
2012
P162,000 overstated
P135,000 overstated
2013
54,000 understated
45,000 understated
Assume that purchases were recorded correctly and that no correcting entries
were made at December 31, 2012, or at December 31, 2013. Ignoring income taxes, by
how much should Kristine's retained earnings be retroactively adjusted at January 1,
2014?
P144,000 increase
P18,000 decrease
P36,000 increase
P9,000 increase
SOLUTION:
P54,000 (u) + P135,000 (u) P45,000 (o) = P144,000 (u)
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #3
Corrections of error are reported in
Retained earnings
Other comprehensive income
Other income or expense
Shareholders' equity
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #4
The following errors in the accounting records of Philip Company were discovered
on January 1, 2013:
2010
2011
2012
Ending inventory overstated
900,000
800,000
Depreciated understated
300,000
Accrued rent revenue not recorded
140,000
250,000
Accrued interest expense not recorded
20,000
What is the net effect of the errors on the January 1, 2013 retained earnings?
What is the net effect of the errors on the January 1, 2013 retained earnings?
730,000 over
820,000 over
570,000 over
1,120,000 over
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #5
On December 31, 2013, special insurance costs, incurred but unpaid, were not
recorded. If these insurance costs were related to work in process, what is the effect of
the omission on accrued liabilities and retained earnings in the December 31, 2013
balance sheet?
Accrued Liabilities (Understated); Retained Earnings (Overstated)
Accrued Liabilities (Understated); Retained Earnings (No effect)
Accrued Liabilities (No effect); Retained Earnings (No effect)
Accrued Liabilities (No effect); Retained Earnings (Overstated)
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #6
Prior period errors
Are corrected through accumulated profit or loss
Are corrected through current profit or loss
Do not cause misstatements in current period FS
Do not reverse themselves in the future in all circumstances
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #7
Prior period errors
Are corrected through current profit or loss
Do not cause misstatements in current period FS
Do not reverse themselves in the future in all circumstances
Are corrected through accumulated profit or loss
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #8
Which of the following is a correction of an error?
Increase in percentage for recording product warranty expense
Change in measurement basis
Revision in the total minerals to be extracted because it was overstated in the
previous year.
From direct writeoff to allowance method in recording bad debts
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #9
Nando Co. purchased machinery that cost P810,000 on January 4, 2011. The
entire cost was recorded as an expense. The machinery has a nine-year life and a
P54,000 residual value. The error was discovered on December 20, 2013. Ignore income
tax considerations.
Before the correction was made, and before the books were closed on December
31, 2013, retained earnings was understated by
558,000
810,000
642,000
726,000
SOLUTION: SOLUTION:
810,000 - ((810,000-54,000)/9)) x 2) = 642,000
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #10
Josh Company's December 31 year-end financial statements contained the
following errors:
Dec. 31, 2010
Dec. 31, 2011
Ending inventory
P7,500 understated
P11,000 overstated
Depreciation expense
2,000 understated
An insurance premium of P18,000 was prepaid in 2010 covering the years 2010,
2011, and 2012. The prepayment was recorded with a debit to insurance expense. In
addition, on December 31, 2011, fully depreciated machinery was sold for P9,500 cash,
but the sale was not recorded until 2012. There were no other errors during 2011 or
2012 and no corrections have been made for any of the errors. Ignore income tax
considerations.
What is the total net effect of the errors on the amount of Josh's working capital
at December 31, 2011?
Working capital overstated by P1,500
Working capital understated by P12,000
Working capital overstated by P5,000
Working capital understated by P4,500
SOLUTION:
P11,000 (o) - P6,000 (u) - P9,500 (u) = P4,500 (u)
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #11
In determining whether an item is material, consideration must be given to:
both its size and nature.
its size only.
none of the answers are correct
its nature only.
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #12
On December 31, 2013, special insurance costs, incurred but unpaid, were not
recorded. If these insurance costs were related to work in process, what is the effect of
the omission on accrued liabilities and retained earnings in the December 31, 2013
balance sheet?
Accrued Liabilities (No effect); Retained Earnings (No effect)
Accrued Liabilities (No effect); Retained Earnings (Overstated)
Accrued Liabilities (Understated); Retained Earnings (Overstated)
Accrued Liabilities (Understated); Retained Earnings (No effect)
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #13
Ronn Company's assets decreased by P4,000,000 and its liabilities also decreased
by P7,000,000 in the current year. Upon review of the accounting records, it was
determined that Ronn's available for sale securities increased by P200,000 and trading
securities decreased by P400,000 all due to changes in fair value. Also, Ronn received
equipment valued at P200,000 from a nonshareholder as donation with no restrictions
attached, and corrected a prior period error resulting from an overstatement of ending
inventory for P1,000,000. What is the net income for the current year?
4,000,000
3,800,000
4,200,000 Retained earnings understated by P4,500
SOLUTION:
P2,000 (o) + P11,000 (o) - P6,000 (u) - P9,500 (u) = P2,500 (u).
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #18
Gabriel Company's beginning inventory was understated by P260,000 and the
ending inventory was overstated by P520,000. What was the effect of the errors on the
cost of goods sold for the current year?
780,000 overstated
260,000 understated
780,000 understated
260,000 overstated
2.0 Financial Accounting and Reporting - Error Correction (Average)
Question #19
During the current year, an entity discovered that ending inventory of the prior
year was understated. How should the entity account for this understatement in the
comparative statement?
Adjust the beginning inventory.
Make no entry because the error will self-correct.
Restate the financial statements with corrected balances for all periods
presented.
Adjust the ending balance in the retained earnings account.
2.0 Financial Accounting and Reporting - Error Correction (Average)
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