CHAPTER 8

ERRORS AND THEIR CORRECTIONS

PROBLEMS

8-1.
2011 profit 2012 profit
a. Understated Overstated
b. Overstated Understated
c. Overstated Understated
d. Understated Overstated
e. No effect No effect
f. Overstated No effect
g. No effect No effect
h. Overstated understated
i. Overstated Understated
j. Understated Overstated
k. Overstated Understated

8-2. (JOY COMPANY)

Understatement (overstatement)
12/31/12 12/31/12
Working Retained
2012 Profit Capital Earnings
Understatement of 12/31/11 inventory (48,000) -- --
Overstatement of 12/31/12 inventory (40,500) (40,500) (40,500)
Understatement of 2011 depreciation expense -- -- (11,500)
3-year insurance premium charged to expense in 2011 (110,000) 110,000 110,000
Unrecorded sale of fully depreciated machine in 2012 75,000 75,000 75,000
Net understatement (overstatement) P(123,500) P144,500 P133,000

8-3. (TOY COMPANY)

2011 2012
Reported profit P195,000 P210,000
Overstatement of 2011 ending inventory ( 36,000) 36,000
Understated 2011 accrued expenses ( 40,000) 40,000
Unrecognized supplies inventory, end of 2012 _ - 15,000
Corrected profit P119,000 P301,,000

8-4. (BOY, INC.)

Effect on 12/31/12 Retained Earnings
Understated (Overstated)
Understated 2011 ending inventory 0
Overstated 2011 depreciation expense 12,500
Understated 2012 ending inventory 5,000
Understated 2012 depreciation expense ( 4,000)
Net understatement in retained earnings P13,500

Retained earnings as of December 31, 2012 should be increased by P13,500

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Chapter 8 – Errors and their Corrections

8-5. (COY COMPANY)

(a)
a. Prepaid insurance 9,300
Operating expenses 3,100
Retained earnings 12,400

b. Retained Earnings 16,750

Trading Securities 16,750
Trading Securities 24,250
Unrealized Gains on Trading Securities 24,250
202,500 – 178,250 = 24,250
c. Operating Expenses 5,500
Allowance for Bad Debts 5,500
98,000 – 92,500 = 5,500
d. Retained earnings 37,750
Cost of goods sold 37,750
Cost of goods sold 49,500
Inventory 49,500
e. Machinery 75,000
Operating expenses 6,250
Retained earnings 68,750
Accumulated depreciation 12,500
(b)
2011 2012
Reported net income P487,500 P550,000
Adjustments: a. 12,400 ( 3,100)
b. (16,750 24,250
c. (5,500)
d. (37,750) 37,750
(49,500)
e. 68,750 ( 6,250)
Corrected profit P514,150 P547,650

8-6. (SOY COMPANY)

2011 2012
Reported profit P145,000 P185,000
(a)Rent income of 2012 recorded in 2011 (6,500) 6,500
(b)Omission of unused supplies
End of 2010 (6,500)
End of 2011 3,700 (3,700)
End of 2012 7,100
(c) Omission of accrued salaries
End of 2010 5,500
End of 2011 (7,500) 7,500
End of 2012 (4,700)
Corrected profit P133,700 P197,700

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Chapter 8 – Errors and their Corrections

8-7. (FELLOW COMPANY)

a. Equipment 120,000
Accumulated depreciation 20,000
Operating expenses 100,000

b. Profit from self-construction 100,000

Warehouse 100,000

c. Operating expenses 100,000

Accumulated depreciation 100,000
1,200,000 – (60,000 x 5 yrs) =900,000
900,000/(14-5) = 100,000

d. Operating expenses 20,000

Accumulated depreciation 130,000
Gain on sale of machine 30,000
Machine 120,000

8-8. (DOY CORPORATION)

Inventory Accounts Payable Net Sales

Initial amounts P1,750,000 P1,200,000 P8,500,000
Adjustments: 1. - - (35,000)
2. 50,000 50,000 -
3. 20,000 - -
4. 26,000 - (40,000)
5. 25,000 - -
6. 30,000 - -
7. - 60,000 -
8. 2,000 4,000 -
Adjusted amounts P1,903,000 P1,264,000 P8,425,000

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Chapter 8 – Errors and their Corrections

8-9. (SOY COMPANY)

(a) 2010 2011 2012

Reported profit (loss) P490,000 P670,000 P(320,000)
a. Failure to record accrued expenses
2010 (34,000) 34,000
2011 (28,000) 28,000
2012 (43,000)
b. Overstated ending inventories
2010 (63,000) 63,000
2011 (28,000) 28,000
2012 (43,000
c. Failure to record accrued interest revenue
2010 12,000 (12,000)
2011 6,000 (6,000)
2012 8,000
d. Failure to recognize unearned rent
2010 (24,000) 24,000
2011 (20,000) 20,000
2012 (18,000)
e. Failure to record purchases on account
2011 (25,000) 25,000
2012 (20,000)
f. Repairs expense erroneously capitalized
2011 (120,000 – 12,000) (108,000)
2012 (80,000 – 8,000) (72,000)
g. Failure to recognize prepaid insurance
2010 4,800 (4,800)
2011 6,200 (6,200)
2012 ________ ________ 7,800
Correct profit P385,800 P577,400 P(411,400)

(b)
Correcting entries
a. Retained earnings 28,000
Expenses 15,000
Accrued expenses 43,000

b. Retained earnings 28,000

Cost of goods sold 15,000
Inventory 43,000

c. Interest receivable 8,000

Retained earnings 6,000
Interest revenue 2,000

d. Retained earnings 20,000

Rent revenue 2,000
Unearned rent 18,000

e. Retained earnings 25,000

Accounts payable 20,000
Cost of goods sold 5,000

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Chapter 8 – Errors and their Corrections

f. Retained earnings 108,000

Accumulated depreciation 20,000
Expenses 72,000
Property, plant and equipment 200,000

g. Prepaid insurance 7,800

Retained earnings 6,200
Expenses 1,600

MULTIPLE CHOICE

MC1 B
MC2 C
MC3 A
MC4 A
MC5 B 200,000/5 = 40,000
MC6 A 30,000 over + 27,000 over + 7,500 over – 48,000 under = 16,500 net overstatement.
MC7 A 27,000 over – 7,500 under – 48,000 under = 28,500 net understatement.
MC8 C 27,000 over + 6,000 over – 48,000 under – 7,500 under = 22,500 net understatement.
MC9 A 250,000 – 100,000 + 150,000 – 50,000 – (30,000 x 4/6) + (120,000 x 18/24 = 320,000
MC10 A 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
MC11 D 312,500 + 25,000 - 4,000 – 50,000 – 18,000 – 30,000 = 235,500
MC12 A 10,000 – 8,000 = 2,000 net understated
MC13 D 10,000 + 25,000 – 8,000 = 27,000 net understated
MC14 C
MC15 C 2011 net income : 8,000 overstated – 2,000 understated ; 2012 net income 8,000
understated – 2,000 overstated.
MC16 B 2,300,000 + 60,000 – 40,000 – 50,000 + 100,000 = 2,370,000
MC17 B 10,000 – 7,700 = 2,300
MC18 D 258,000 – 7,700 = 250,300
MC19 B 589,500 – 112,500 – 16,000 = 461,000
MC20 C
MC21 D 613,400 + 90,000 + 12,000 – 28,000 = 687,400
MC22 A 20,000 + 13,500 – 8,000 = 25,500
MC23 A The shares are treasury shares and not investment in shares
MC24 A
MC25 D
MC26 D
MC27 A
MC28 A 300,00 – 80,000 = 220,000
MC29 A 60,000 – 4,000 – 12,000 = 44,000
MC30 C 434,900 + 12,000 = 446,900
MC31 D 60,000 + 15,000 = 75,000
MC32 C 1,500,000 X 12% x 10/12 = 150,000
MC33 C
MC34 D
MC35 D
MC36 D Retained earnings beginning of 430,000 as reported – correction of prior period errors of
P20,500 ( - 36,000 + 31,500 – 16,000) + 2010 corrected net income of 298,800
MC37 D
MC38 D 2,500,000 – 112,500 – 50,000 – 80,000 = 2,257,500
MC39 B 1,300,000 – 90,000 – 36,000 + 28,000 = 1,202,000
MC40 C 500,000 + 7,700 + 30,000 + 18,000 + 8,000 – 4,000 – 16,000 + 15,000 = 558,700

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Chapter 8 – Errors and their Corrections

MC41 A 80,000 + 18,000 + Accrued interest of 150,000 * ( although finance costs should be
presented separately, as required by PAS 1, total interest cost included in other losses and
expenses is 190,000); thus, other losses and expenses = 248,000 – 190,000 = 58,000
MC42 B 30,000 – 4,000 = 26,000
MC43 A 20,000 + 31,500 = 51,500
MC44 D 75,000 + 16,000 = 91,000
MC45 B 430,000 – 36,000 + 31,500 – 16,000 = 409,500
MC46 A 950,000 + 36,000 = 986,000
MC47 C 450,000 – 31,500 + 16,000 = 434,500

Correcting entries in 2012 for Take One Corporation (MC 17 – 47)

Operating Expenses 7,700

Cash 7,700

Sales 112,500
Accounts receivable 112,500

Inventories 90,000
Cost of Sales 90,000

Allowance for Bad Debts 16,000

Accounts Receivable 16,000

Operating Expenses 30,000

Allowance for Bad Debts 30,000

Inventories 12,000
Accounts Payable 12,000

Retained Earnings 36,000

Cost of Sales 36,000

Cost of Sales 28,000

Inventories 28,000

Treasury Stock 260,000

Investments in Stock 260,000

Operating Expenses 18,000

Prepaid Expenses 13,500
Retained Earnings 31,500

Operating Expenses 8,000

Prepaid Expenses 8,000

Accumulated Depreciation – Equipment 4,000

Operating Expenses 4,000

Sales 50,000
Accumulated Depreciation – Equipment 12,000
Loss on Sale of Equipment 18,000
Equipment 80,000

Interest Expense (Other Losses and Expenses) 150,000

Interest Payable 150,000

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Chapter 8 – Errors and their Corrections

Mortgage Payable 500,000

Current Portion of Mortgage Payable 500,000

Retained Earnings 16,000

Operating Expenses 16,000

Operating Expenses 15,000

Accrued Expenses 15,000

Sales 80,000
Advances from Customers 80,000

Working Paper adjustments to restate 2011 financial statements

Cost of Sales 36,500

Inventory 36,500

Prepaid expenses 31,500

Operating Expenses 31,500

Operating Expenses 16,000

Accrued Expenses 16,000

Mortgage Payable 500,000

Current Portion of Mortgage Payable 500,000

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