Chapter 2

Misstatements in the Financial Statements

Problem 1 Black Jack

12/31/17 Assets 2017 Profit 12/31/18 Assets 2018 Profit

1. U U U O
2. O U O U
3. U U U O
4. U U U NE
5. U O U O

Problem 2 Love Copany

Under(Over) statement in Profit of Retained
Nature of error Earnings 2018 Accounts Affected
01/01/18
2016 2017 2018 Account Dr. Cr.
Omission of prepaid
expenses
12/31/16 29,000 (29,000)
12/31/17 30,000 (30,000) 30,000 Expenses 30,000
12/31/18 34,000 Prepaid expenses 34,000
Expenses 34,000
Omission of unearned
revenue:
12/31/16 (20,000) 20,000
12/31/17 (28,000) 28,000 (28,000) Revenue 28,000
12/31/18 (15,000) Revenue 15,000
Unearned revenue 15,000
Omission of accrued
expenses:
12/31/16 (27,500) 27,500
12/31/17 (25,000) 25,000 (25,000) Expenses 25,000
12/31/18 (27,000) Expenses 27,000
Accrued expenses 27,000
Omission of accrued
revenues
12/31/16 42,500 (42,500)
12/31/17 45,000 (45,000) 45,000 Revenues 45,000
12/31/18 41,000 Accrued revenues 41,000
Revenues 41,000
Net
under(over)statement 24,000 ( 2,000) 11,000 22,000
Reported profit(loss) (120,000) 100000 200,000
Corrected profit(loss) (96,000) 98,000 211,000

Problem 3
1. Retained Earnings 160,000
Wages Expense 160,000

2. No entry (error had been counterbalanced).

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3. Insurance Expense (12/36 x 60,000) 20,000
Prepaid Insurance (15/36 x 60,000) 25,000
Retained Earnings 45,000

4. Supplies Expense 25,000

Retained Earnings 25,000

Unused Supplies 28,000

Supplies Expense 28,000

5. Retained Earnings 80,000

Accumulated Amortization – Development Cost 80,000
Capitalized Development Cost 120,000
Amortization Expense – Development Cost 40,000

6. Retained Earnings 93,333

Service Revenue 40,000
Unearned Service Revenue 53,333

7. Retained Earnings 36,000

Rent Revenue 36,000

8. Office Equipment 1,500,000

Depreciation Expense - Equipment 300,000
Accumulated Depreciation 900,000
Retained Earnings 900,000

Problem 4

(Function of Expense Method)

1. Cost of Goods Sold
Retained Earnings

2. Cost of Goods Sold

Inventory

3. Retained Earnings
Cost of Goods Sold

4. Inventory
Accounts Payable

5. Cost of Goods Sold

Retained Earnings

6. Sales
Retained Earnings

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Problem 5 (Dragon Ball Company)

(1) Schedule to compute correct profit:

Under(over)statement in Profit
2016 2017 2018 RE, 1/1/18
Omission of accrued wages
12/31/16 (80,000) 80,000
12/31/17 (60,000) 60,000 (60,000)
12/31/18 (78,000)
Omission of unused supplies
12/31/16 32,000 (32,000)
12/31/17 25,000 (25,000) 25,000
12/31/18 22,400
Omission of accrued interest income
12/31/17 18,000 (18,000) 18,000
Sale of equipment - Proceeds (25,000)
Gain on sale 7,000
Recorded depreciation 4,200 4,200 4,200 (9,600)
Omission of unearned rent (40,000)
Net under(over)statement (61,800) 35,200 (74,400) (26,600)
Reported Profit 450,000 290,000 440,000
Corrected Profit 388,200 325,200 365,600

(2) Audit adjusting entries:

Retained Earnings 60,000

Wages Expense 60,000

Wages Expense 78,000

Wages Payable 78,000

Supplies Expense 25,000

Retained Earnings 25,000

Unused Supplies 22,400

Supplies Expense 22,400

Retained Earnings 9,600

Accumulated Depreciation 36,600
Equipment 42,000
Depreciation Expense 4,200

(3) Correcting entries in 2018

Retained Earnings 78,000

Wages Expense 78,000

Supplies Expense 22,400

Retained Earnings 22,400

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Retained Earnings 5,400
Accumulated Depreciation 36,600
Equipment 42,000

Problem 6 (Erasure Company)

1. Accumulated Depreciation 27,500

Depreciation Expense 9,167
Retained Earnings 18,333

2. Retained Earnings 65,000

Salaries Expense 65,000

3. Loss on Damages 135,000

Retained Earnings 135,000

4. Goodwill 24,000
Accumulated Amortization – GW 24,000

Retained Earnings 12,000

Amortization of Goodwill 12,000
Accumulated Amortization – Goodwill 24,000
(Note: SMEs amortize Goodwill over ten years)

5. Sales 340,000
Advances from Customers 340,000

6. Retained Earnings 54,000

Accumulated Depreciation 6,000
Equipment 60.000

Repairs and Maintenance 50,000

Equipment 50,000

Accumulated Depreciation (10% x (60,000+ 50,000) 11,000

Depreciation Expense 11,000

7. Cost of Sales 51,000

Retained Earnings 51,000

Cost of Sales 30,000

Inventory 30,000

8. No entry ( no effect on cost of sales of 2016 and 2017; Cost of sales had been set up; both purchases and
beginning inventory for 2017 had been transferred to cost of sales)

Problem 7 (Gloria Company)

Audit adjustments to correct 2017 financial statements Audit adjustments to correct 2018 financial statements

Other operating income 8,000 Retained earnings 8,000

Unearned commission income 8,000 Other operating income 8,000

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Other operating income 6,400
Unearned commission income 6,400

Prepaid rent 16,000 Selling and administrative expenses 16,000

Selling and administrative expenses 16,000 Retained earnings 16,000

Prepaid rent 21,000

Selling and administrative expenses 21,000
Interest receivable 8,000 Other operating income 8,000
Other operating income 8,000 Retained earnings 8,000

Interest receivable 12,000

Interest income 12,000

Sales 90,000
Advances from customers 90,000

Cost of sales 15,000 Retained earnings 15,000

Accounts payable 15,000 Cost of sales 15,000

Equipment 20,000 Equipment 20,000

Selling and administrative expenses 20,000 Retained earnings 18,000
Accumulated depreciation 2,000

Selling and administrative expenses 2,000 Selling and administrative expenses 4,000
Accumulated depreciation 2,000 Accumulated depreciation 4,000

(a)
Gloria Company
Comparative Statements of Comprehensive Income
For the Years Ended December 31, 2018 and 2017

2018 2017
Sales P 910,000 P 720,000
Cost of Sales 585,000 465,000
Gross Profit P 325,000 P 255,000
Other Operating Income 73,600 30,000
Total Income P 398,600 P 285,000
Less: Selling and Administrative Expenses 279,000 156,000
Net Income from Operations P 119,600 P 129,000
Interest Expense 80,000 20,000
Net Income P 39,600 P 109,000

(b) Effect on total assets, December 31, 2017 (see audit adjusting entries for 2017)
= 16,000 + 8,000 + 20,000 – 2,000 = P42,000 understated

(c) Effect on total assets, December 31, 2018(see audit adjusting entries for 2018)
= 21,000 + 12,000 + 20,000 – 2,000 – 4,000 = P47,000 understated.

(d) Effect on total liabilities, December 31, 2018 (see audit adjusting entries for 2018)
= 6,400 + 90,000 = 96,400 understated

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Problem 8 Golden Crest

Particulars 2017 Profit Retained earnings, Non- current Retained earnings

Dec. 31, 2017 Assets, 12/31/18 January 1, 2017
Omission of unused supplies
12/31/17 15,000 15,000
12/31/18
Repairs charged to equipment on 1/1/16 (8,500) (68,000) (59,500) (76,500)
AFS securities were measured at cost 50,000
Correct cost of equipment, P746,070
Recorded cost 900,000
Difference 153,930 (153,930)
Difference in depreciation
2017 153,930 x 10% x 3/12 = 3,848 3,848 3,848 3,848
2018 153,930 / 10 = 15,393 15,393
Interest expense
2017 P74,607 x 3/12 = (18,652) (18,652)
Net under (overstatement) (6,504) (67,804) (144,189) (76,500)

Present value of the note on October 1, 2017 = 300,000 x 2.4869 = 746,070

Amortization table for the note payable
Date Periodic Payment Applied to Interest Applied to Principal Bal. of Principal
October 1, 2017 746,070
September 30, 2018 300,000 74,607 225,393 520,677
September 30, 2019 300,000 52,068 247,932 272,745

Problem 9 (Golden Harvest Corporation)

(a) Computation of correct profit (loss)
Particulars 2017 2018 2019
Omissions of
Accrued expenses, 12/31/17 (20,000) 20,000
12/31/18 (25,000) 25,000
12/31/19 (30,000)
Accrued income 12/31/17 32,000 (32,000)
12/31/18 30,000 (30,000)
12/31/19 26,000
Prepaid expenses 12/31/17 12,000 (12,000)
12/31/18 18,000 (18,000)
12/31/19 24,000
Unearned income 12/31/17 (15,000) 15,000
12/31/18 (10,000) 10,000
12/31/19 (8,000)
Omission in the ending inventory
2018 28,000 (28,000)
2019 64,000
Machine charged to expense on August 31, 2017 80,000
Depreciation on the machine (3,333) (10,000) (10,000)

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Net understatement (overstatement) 85,667 22,000 25,000
Reported profit (loss) (250,000) 320,000 380,000
Correct profit (loss) 164,333 342,000 405,000

Computation of retained earnings

2017 2018 2019
Balance, January 1 P 0 P(164,333) P117,667
Profit (loss) (164,333) 342,000 405,000
Dividends declared (60,000) (100,000)
Balance, December 31 P(164,333) P117,667 422,667

(b) 2019 Audit Adjusting Entries

Retained Earnings 25,000

Operating Expenses 25,000

Operating Expenses 30,000

Accrued Expenses 30,000

Income 30,000
Retained Earnings 30,000

Accrued Income 26,000

Income 26,000

Expenses 18,000
Retained Earnings 18,000

Prepaid Expenses 24,000

Expenses 24,000

Retained Earnings 10,000

Income 10,000

Income 8,000
Unearned Income 8,000

Inventory, beginning/Cost of Sales 28,000

Retained Earnings 28,000

Inventory, end 64,000

Income Summary/ Cost of Sales 64,000

Machinery 80,000
Operating Expenses 10,000
Retained Earnings 66,667
Accumulated Depreciation 23,333

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Problem 10 (Sukiyaki Corporation)

Audit Adjustments to restate 2017 FS Audit Adjustments to Restate 2018 FS

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

Other Operating Expenses – Unrealized Held for Trading Equity Securities 7,000
Loss on Trading Sec. 3,000 Retained Earnings 3,000
Held for Trading Equity Securities 3,000 Other Operating Income –
Unrealized Gain on Trading Sec. 10,000
Cost of Sales 8,900 Retained Earnings 8,900
Merchandise Inventory 8,900 Cost of Sales 8,900

Cost of Sales 13,600

Merchandise Inventory 13,600

Equipment 36,000 Equipment 36,000

Operating Expenses 36,000 Retained Earnings 36,000

Operating Expenses 3,000 Retained Earnings 3,000

Accumulated Depreciation 3,000 Operating Expenses 3,000
(36,000 -6,000)/13 Accumulated Depreciation 6,000

Accumulated Depreciation 20,000

Equipment 17,000
Other Operating Income –
Gain on Sale of Equipment 3,000

Prepaid Insurance 6,000 Prepaid Insurance 3,000

Operating Expenses 3,000 Operating Expenses 3,000
Retained Earnings 9,000 Retained Earnings 6,000

Sukiyaki Corporation
Statement of Comprehensive Income
For the Years Ended December 31, 2018 and 2017

2018 2017
Sales P1,000,000 P900,000
Cost of Sales 434,700 403,900
Gross Profit P 565,300 P 496,100
Gain on Sale of Equipment 3,000
Unrealized Gain on Trading Securities 10,000 ________
Total Income 578,300 496,100
Operating Expenses (351,000) (280,000)
Unrealized Loss on Trading Securities (3,000)
Profit P227,300 P 213,100

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Sukiyaki Corporation
Statement of Financial Position
December 31, 2018 and 2017

2018 2017

Current Assets
Cash P183,000 P 2,000
Held for Trading Equity Securities 85,000 75,000
Accounts Receivable, net 360,000 278,000
Merchandise Inventory 193,400 193,100
Prepaid Expenses 3,000 6,000
Total Current Assets P 824,400 P554,100
Non-Current Assets
Property, Plant and Equipment, net of Acc. Deprn P 78,400 P 96,100
Total Assets P902,800 P650,200

Current Liabilities
Accounts Payable P121,400 P196,100

Shareholders’ Equity
Ordinary Share P260,000 P180,000
Share Premium 20,000 0
Retained Earnings 501,400 274,100
Total Shareholders’ Equity P781,400 P 454,100
Total Liabilities and Shareholders’ Equity P902,800 P650,200

Sukiyaki Corporation
Cash Flow Statement
For the Year Ended December 31, 2018

Cash Flow From Operating Activities

Collection from customers P904,000
Payment to Suppliers (509,700)
Payment for expenses (315,800)
Net cash flow from operations P78,500
Cash Flow From Investing Activities
Sale of equipment P 3,000
Purchase of equipment ( 500)
Net cash flow from investing activities 2,500
Cash Flow From Financing Activities
Issue of ordinary share (80,000 + 20,000) 100,000
Increase in cash P181,000
Cash Balance, January 1, 2018 2,000
Cash Balance, December 31, 2018 P183,000

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Computations: 2018 2017

Accounts Receivable P392,000 P296,000
Allowance for Uncollectible Accounts 32,000 18,000
AR, Net P360,000 P278,000

Property, Plant and Equipment

Cost P186,000 P205,500
Accumulated Depreciation 107,600 109,400
Carrying value P 78,400 P 96,100

Accounts Receivable, beg. P296,000

Sales 1,000,000
Accounts Receivable, end (392,000)
Collections from customers P904,000

Inventory, end P193,400

Cost of sales 434,700
Inventory, beg. (193,400)
Purchases P434,700
Accounts Payable, beginning 196,100
Accounts Payable, end (121,400)
Payment to suppliers P509,700

Accumulated depreciation, end P107,600

Accumulated depreciation of equipment sold 20,000
Accumulated depreciation, beg. (109,400)
Depreciation expense P18,200

Operating expenses P351,000

Depreciation ( 18,200)
Doubtful accounts expense 32,000 – 18,000 ( 14,000)
Decrease in prepaid expenses ( 3,000)
Operating expenses paid P315,800

Property, Plant and Equipment, cost, end P186,000

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

Problem 11 (Tahoma Corporation)

Adjusting Entries – December 31, 2018

Sales 180,000
Retained Earnings 180,000

Accounts Receivable 240,000

Sales 240,000

Retained Earnings 175,000

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Purchases 175,000

Purchases 140,000
Accounts Payable 140,000

Sales 20,000
Unearned Revenue 20,000

Retained Earnings 36,000

Sales 36,000

Retained Earnings 35,000

Expenses 35,000

Expenses 50,000
Accrued Expenses 50,000

Inventory, beginning 75,000

Retained Earnings 75,000

Inventory, end 110,000

Income Summary 110,000

Advances to Suppliers 50,000

Purchases 50,000

Retained Earnings 3,333

Expenses 10,000
Accumulated Depreciation – Printing Equipment 13,333

Expenses 37,500
Retained Earnings 12,500
Accumulated Depreciation – Building 50,000

Expenses 24,000
Allowance for Uncollectible Accounts 24,000

Interest Expense (500,000 x 12% x 8/15) 40,000

Retained Earnings (500,000 x 12% x 4/15) 20,000
Operating Expenses 60,000
(Note: 2 semi-annual payments were made in 2018; both were charged to operating expenses, balance of Mortgage
payable before the annual payment in August 2018 is 450,000 + 50,000)

Interest Expense 18,000

Interest Payable 18,000
450,000 x 12% x 4/15

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Tahoma Company
Statement of Comprehensive Income
For the Year Ended December 31, 2018

Sales P 2,076,000
Cost of Sales
Inventory, January 1 75,000
Purchases 915,000
Inventory, Dec. 31 (110,000)
Cost of Sales 880,000
Gross Profit 1,196,000
Selling and Administrative Expenses 776,500
Profit before interest expense 419,500
Interest expense 58,000
Profit 361,500

Tahoma Company
Statement of Financial Position
December 31, 2018

Assets
Current Assets
Cash P 750,000
Accounts receivable, net of allowance for uncollectible accounts of P24,000 216,000
Advances to suppliers 50,000
Inventory 110,000
Total current assets P1,126,000
Non-current assets
Land P 400,000
Building, net of P50,000 accumulated depreciation 700,000
Printing equipment, net of P13,333 accumulated depreciation 86,667
Total property, plant and equipment P1,186,667
Total assets P2,312,667
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts payable P 140,000
Accrued expenses 50,000
Current portion of mortgage payable 50,000
Interest payable 18,000
Unearned revenue 20,000
Total current liabilities P278,000

Non-current liabilities
Mortgage payable, net of current portion P 400,000
Total liabilities P 678,000

Shareholders’ Equity
Ordinary share capital P 1,000,000
Retained earnings *634,667
Total shareholders’ equity P 1,634,667
Total liabilities and shareholders’ equity P2,312,667

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*Retained earnings, January 1, 2018 before adjustment P 300,000
Correction of prior period errors (26,833)
Profit for 2018 361,500
Retained earnings, December 31, 2018 P 634,667

Multiple Choice

1. A 700,000 + 29,000 – 33,000 – 15,000 – 22,000+ 18,000

2. C -33,000 – 15,000 – 15,000 + 18,000 = ( 45,000 )
3. A - 29,000 – 15,000 + 22,000 = (22,000)
4. A 5,000,000 + 200,000 – 250,000 – 300,000 + 100,000 = 4,750,000
5. B (300,000) + (50,000) + 100,000 = (250,000)
6. A - 16,000 – 15,000 – 10,000 + 10,800 = (30,200)
7. A - 15,000 + 10,800 = (4,200)
8. B 5,000,000 – 200,000 – 150,000 = 4,650,000
9. B 2,500,000 – 1,000,000 + 1,500,000 – 500,000 – 200,000 + 600,000 = 2,900,000
10. D 1,500,000 + 600,000 = 2,100,000
11. B 1,000,000 + 500,000 + 200,000 = 1,700,000
12. B 200,000 / 5
13.. C 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000
14. B 3,000,000 – 400,000 = 2,600,000
15. A Profit is understated by 70,000 + 30,000; RE is understated by P30,000; P7,000 has been
counterbalanced.
16. D 50,400 / 9 = 5,600
17. C 54,000 – 11,200 = 42,800
18. C
19 A 400,000 + 300,000 + 500,000 – 350,000 = 850,000 net overstatement
20. A -300,000 – 500,000 + 200,000 = 600,000 overstated
21. A

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