No. 125 Brgy.

San Sebastian
Lipa City, Batangas, Philippines
Mobile : 0927 283 8234
Telephone : (043) 723 8412
Gmail : [email protected]

AP08-02 jsabellar/aljabinal

CORRECTION OF ERRORS; CASH TO ACCRUAL; SINGLE ENTRY ACCOUNTING

MCQ – CONCEPTUAL:

1. Which of the following concepts or principles relates most directly to reporting accounting
changes and errors?
a. conservatism
b. consistency
c. objectivity
d. materiality

2. An example of an item that should be reported as a prior-period adjustment is the

a. Collection of previously written-off accounts receivable
b. Payment of income taxes resulting from examination of prior years’ income tax returns
c. Correction of an error in financial statements of a prior year
d. Receipt of insurance proceeds for damage to a building sustained in a prior year

3. Statement 1: A change in accounting principle is a change that occurs as the result of new
information or additional experience.
Statement 2: Errors in financial statements result from mathematical mistakes or oversight
or misuse of facts that existed when preparing the financial statements.
Statement 3: Adoption of a new principle in recognition of events that have occurred for
the first time or that were previously immaterial is treated as an accounting change.

a. True, True, False

b. True, True, True
c. False, True, False
d. False, True, True

4. Presenting consolidated financial statements this year when statements of individual

companies were presented last year is
a. a correction of an error.
b. an accounting change that should be reported prospectively.
c. an accounting change that should be reported by restating the financial statements of
all prior periods presented.
d. not an accounting change.

5. Counterbalancing errors do not include

a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.

6. Statement 1: Balance sheet errors affect only the presentation of an asset or liability account
Statement 2: Counterbalancing errors are those that will be offset and that take longer than
two periods to correct themselves.
Statement 3: For counterbalancing errors, restatement of comparative financial statements
is necessary even if a correcting entry is not required.
Statement 4: Companies must make correcting entries for non-counterbalancing errors,
even if they have closed the prior year’s books.

a. True, True, False, True

b. True, False, True, True
c. False, False, False, True
d. False, False, True, True
 7. Which of the following errors could result in an overstatement of both current assets and
stockholders’ equity?
a. An understatement of accrued sales expenses.
b. Noncurrent note receivable principal is misclassified as a current asset.
c. Annual depreciation on manufacturing machinery is understated.
d. Holiday pay expense for administrative employees is misclassified as manufacturing
overhead.

8. On December 31, 2010, special insurance costs were incurred and unpaid, but were not
recorded. If these insurance costs were related to a particular job order in work in process
that was not completed during the period, what is the effect of the omission on accrued
liabilities and retained earnings in the December 31, 2010 balance sheet?

Accrued liabilities Retained earnings

a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated

9. Net income is understated if, in the first year, estimated salvage value is excluded from the
depreciation computation when using the Straight-line method, Production or use method
a. Yes No
b. Yes Yes
c. No No
d. No Yes

10. Liwanag Co. changed from the cash basis of accounting to the accrual basis of accounting
during 2021. The cumulative effect of this change should be reported in Liwanag’s 2021
financial statements as a
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting principle.
c. Current period adjustment resulting from the correction of an error.
d. Current period adjustment resulting from the change in accounting principle.

11. A company using a perpetual inventory system neglected to record a purchase of

merchandise on account at year end. This merchandise was omitted from the year-end
physical count. How will these errors affect assets, liabilities, and stockholders' equity at
year end and net income for the year?

Assets Liabilities Stockholders' Equity Net Income

a. No effect Understate Overstate Overstate.
b. No effect Overstate Understate Understate.
c. Understate Understate No effect No effect.
d. Understate No effect Understate Understate.

12. Which of the following is accounted for as a change in accounting principle?

a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing them as
they become material.
d. A change in inventory valuation from average cost to FIFO.

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 13. The estimated life of a building that has been depreciated 30 years of an originally
estimated life of 50 years has been revised to a remaining life of 10 years. Based on this
information, the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value over the remaining life of the asset.
c. adjust accumulated depreciation to its appropriate balance, through net income, based
on a 40-year life, and then depreciate the adjusted book value as though the estimated
life had always been 40 years.
d. adjust accumulated depreciation to its appropriate balance through retained earnings,
based on a 40-year life, and then depreciate the adjusted book value as though the
estimated life had always been 40 years.

14. Which of the following disclosures is required for a change from sum-of-the-years-digits
to straight-line?
a. The cumulative effect on prior years, net of tax, in the current retained earnings
statement
b. Restatement of prior years’ income statements
c. Recomputation of current and future years’ depreciation
d. All of these are required.

15. An example of a correction of an error in previously issued financial statements is a change

a. from the FIFO method of inventory valuation to the Weighted Average method.
b. in the service life of plant assets, based on changes in the economic environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.

MCQ – COMPUTATION:

16. On January 1, 2018, Piper Co., purchased a machine (its only depreciable asset) for
P300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits
depreciation has been used for financial statement reporting and the elective straight-line
method for income tax reporting. Effective January 1, 2021, for financial statement
reporting, Piper decided to change to the straight-line method for depreciation of the
machine. Assume that Piper can justify the change.

Piper's income before depreciation, before income taxes, and before the cumulative effect
of the accounting change (if any), for the year ended December 31, 2021, is P250,000. The
income tax rate for 2021, as well as for the years 2018-2020, is 30%. What amount should
Piper report as net income for the year ended December 31, 2021?
a. P60,000
b. P91,000
c. P154,000
d. P175,000

17. House of the Rising Sun Co. frequently borrows from the bank in order to maintain
sufficient operating cash. The following loans were at a 12% interest rate, with interest
payable at maturity. The Company repaid each loan on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
11/1/2019 5,000 10/31/2020 1 year
2/1/2020 15,000 7/31/2020 6 months
5/1/2020 8,000 1/31/2021 9 months

The Company records interest expense when the loans are repaid. As a result, interest
expense of 1,500 was recorded in 2020. If no correction is made, by what amount would
2020 interest expense be understated?
a. 540
b. 620
c. 640
d. 720

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 18. SunRise, Inc. reported a retained earnings balance of 150,000 at December 31, 2020. In
June 2021, Tack discovered that merchandise costing 40,000 had not been included in
inventory in its 2020 financial statements. SunRise has a 30% tax rate. What amount
should Tack report as adjusted beginning retained earnings in its statement of retained
earnings at December 31, 2020?
a. 190,000
b. 178,000
c. 150,000
d. 122,000

19. Pride Company reported Shareholders Equity at 345,990 on 2020 and provided
information for the last year and current years balances.
2020 2021
Cash balance 288,443 250,127
Accounts Receivable 850,061 270,446
Total Assets ? 740,873

Additional Information:
Collections 2,124,904
Notes Payable 205,050
Interest rate on Notes Payable is 12%

During the year, the owner withdrew merchandise with book value of 224,890 and sales
value of 245,550 and paid notes payable of the business with a check drawn on a personal
checking account. Total Liabilities for 2021 were 153,451. What is the net income for the
year?
a. 262, 092 c.257, 326
b. 220, 772 d.236, 666

20. On December 31, 2020, Paubaya Company showed shareholders’ equity of 5,000,000.
The share capital of 3,000,000 remained unchanged during the year. Transactions during
the year which affected the equity were: An adjustment of retained earnings for 2019
over depreciation 100,000; 300,000 gain on sale of treasury shares; declared dividends of
600,000 of which 400,000 was paid and net income for 2020 was 800,000. What is the
balance of retained earnings on January 1, 2020?
a. 1,500,000 c. 1,300,000
b. 1,400,000 d. 1,600,000

21. Malaya Ka Na Company provided the following data for the current year:
Sales 10,000,000
Cost of goods sold 5,300,000
Operating expenses 3,800,000
Prepaid Operating expenses - January 1 700,000
Prepaid Operating expenses – December 31 1,000,000
Accounts Receivable – January 1 1,375,000
Accounts Receivable – December 31 1,400,000
Accounts Payable – January 1 1,200,000
Accounts Payable – December 31 1,350,000
Merchandise Inventory – January 1 2,100,000
Merchandise Inventory – December 31 2,500,000

Under cash basis, what amount should be reported as purchases for the current year?
a. 5,550,000 c. 5,850,000
b. 5,700,000 d. 5,150,000

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PROBLEM SOLVING:
Problem 1:
SWUH Company reported net incomes for a three-year period as follows:

2020: P186,000;
2021: P189,000;
2022: P180,000.

In reviewing the 2023 accounts after the books of the prior year were closed, you found out
the following errors:

2020 2021 2022

Overstatement of ending inventory P42,000 P51,000 P24,000
Understatement of accrued advertising expense P6,600 P12,000 P7,200

Instructions
(a) Determine corrected net income for 2020, 2021, and 2022.

Problem 2:

Balances of the assets and equities of the business of DISUNITY Company on Jan. 1, 2023
and Dec. 31, 2023 were as follows:
January 1st 2023 December 31st 2023
Cash in hand P 1,000 P 5,000
Cash at bank 4,000 12,000
Prepaid insurance --- 5,000
Furniture 10,000 15,000
Accounts payable 5,000 7,000
Capital 01.01.2023 10,000 ---
Capital (unadjusted) 12.31.2023 --- 30,000

Additional Information (Dec. 31, 2023):

(1) During the year DISUNITY had withdrawn P72,000 cash for his private use
and had made on additional investment of P50,000.
(2) The Bank Statement showed a debit of P260 for Service Charge and credit of
P840 for interest income.
(3) Insurance of P2,000 had expired.
(4) Depreciation of furniture is to be charged at P3,000.
(5) After incorporating the additional information prepare.

REQUIRED
(a) Statement of profit and loss for the year ended on Dec. 31, 2023.
(b) Balance Sheet as of Dec. 31, 2023

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Problem 3:
A CPA was engaged by Mine Company in 2021 to examine its books and records and to make
whatever corrections as necessary. An examination of the accounts disclosed the following:

a) Dividends had been declared on December 15 in 2019 and 2020 but had not been entered
in the books until paid.

b) Improvements in buildings and equipment of P97,200 had been debited to expense at the
end of April 2018. Improvements are estimated to have 12-year life. The company uses
the straight-line method in recording depreciation and computes depreciation to the nearest
month.

c) The physical inventory of merchandise had been overstated by P28,800 at the end of 2019
and by P42,750 at the end of 2020.

d) The merchandise inventories at the end of 2020 and 2021 did not include merchandise that
was then in transit and to which the company had title. These shipments of P18,900 and
P26,100 were recorded as purchases in January of 2021 and 2022, respectively.

e) The company had failed to record sales commissions payable of P32,400 and P9,900 at the
end of 2020 and 2021, respectively.

f) The company had failed to recognize supplies on hand of P7,650 and P15,480 at the end
of 2020 and 2021, respectively.

The retained earnings account appeared as shown below on the date the CPA began the
examination.
Retained Earnings
585,000 01.01.19 balance
252,000 2019 Net Income
01.10.20 div. paid 139,500 837,000 01.01.20 balance
12.31.20 Net loss 160,200 189,000 03.06.20 Share Premium
01.10.21 div. paid 139,500 726,300 01.01.21 balance
12.31.21 Net loss 173,700
413,100 12.31.21 bal.

1. What is the corrected 2019 net income?

A. P215,100 B. P272,700 C. P364,500 D. P372,600

2. What is the corrected 2020 net loss?

A. P160,200 B. P179,100 C. P198,000 D. P207,000

3. What is the corrected 2021 net loss?

A. P108,720 B. P168,120 C. P194,220 D. P213,120

4. What is the corrected retained earnings on December 31, 2020?

A. P405,900 B. P491,400 C. P549,180 D. P678,600

5. What is the corrected retained earnings on December 31, 2021?

A. P108,180 B. P189,000 C. P278,280 D. P297,180

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 Problem 4

In reviewing the 2021 accounts of Angat Buhay Company after the books were closed, you found
out the following:
a. In 2021, the Company reported a net income of 200,000. This number is based from the
extracted GL balances of the Company.
b. From the prior year audit work papers, the following transactions are tagged as “period
13 audit adjustments”. Upon closer examination, you found out that these entries were
taken up by the client as FS adjustments (adjusted directly in the FS) and were not actually
booked and reflected in the GL accounts.
i. Purchases 10,000
Accounts payable (10,000)
ii. Ending inventory 5,000
Income summary (5,000)
c. At the beginning of 2020, the Company was forced to terminate its manual accounting
process and migrate to cloud computing under a “Software as a Service” (SaaS)
arrangement. The arrangement gives the Company the right to access the vendor’s
software running on the vendor’s cloud infrastructure on a subscription type basis. The
company took up a non-refundable 7-year subscription at 455,000 and carried it as an
intangible asset. However, at the start of 2021, the company was certain that it will tap a
different service provider after the end of 2024 because the software’s interface is not
user-friendly. Despite this certainty, the Company did not adjust its expected useful life
in 2021 and continued to use the 7-year term because it argues that the non-cancellable
contract term should be followed in amortizing the software.
d. Understatement of accrued advertising expense in 2020 and 2021 amounting to 51,000
and 24,000 respectively.
e. The Finance Department of the Company went on a 2-week office shutdown starting 20
December 2021. As a result, goods costing 20,000 sold at a 25% cost mark-up was only
recorded on January 2022. These items were picked up by customers in the warehouse on
December 22 and were correctly excluded in the inventory count held on 31 December
2021.
f. In 2021, the Company has provided you the following lapsing schedule (excerpt). All the
PPE items have 5 years useful lives. For the years 2020 and 2021, it recognized 50,600
as annual depreciation expense, respectively.

Asset Asset Amount Payment Date Dep’n Dep’n Dep’n Dep’n Dep’n Dep’n
Type number 2018 2019 2020 2021 2022 2023 –
end life
Laptop 30,000 Jan 3, 2018* 6,000 6,000 6,000 6,000 6,000 -
LP-001
Laptop 20,000 June 3, 2019 - 2,000 4,000 4,000 4,000 6,000
Laptop 45,000 Jan 3, 2018* 9,000 9,000 9,000 9,000 9,000 -
LP-002
Laptop 13,000 June 3, 2019 - 1,300 2,600 2,600 2,600 3,900
Laptop 25,000 June 3, 2019* - 2,500 5,000 5,000 5,000 7,500
LP-003
Laptop 25,000 January 3, 2020 - - 5,000 5,000 5,000 10,000
Laptop 16,000 June 3, 2019* - 1,600 3,200 3,200 3,200 4,800
LP-004
Laptop 24,000 January 3, 2020 - - 4,800 4,800 4,800 9,600
Laptop LP-005 55,000 January 3, 2020* - - 11,000 11,000 11,000 22,000
TOTAL 253,000 15,000 22,400 50,600 50,600 50,600 63,800
*also the delivery date

Questions:
1. What is the corrected net income for 2021?
a. 209,500
b. 317,000
c. 219,500
d. 224,500

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2. What is the adjusted balance of intangible assets as of December 31, 2021?
a. 292,500
b. 325,000
c. 357,500
d. 0

3. What is the adjusted balance of PPE,net as of December 31, 2021?

a. 99,600
b. 114,400
c. 150,200
d. 165,000

4. By how much should the opening Retained Earnings balance in 2021 be adjusted?
a. (65,800)
b. 460,800
c. (70,800)
d. (56,000)

5. By how much should the reported net income in 2021 be adjusted?

a. 117,000
b. 9,500
c. 19,500
d. 24,500

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