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Quiz#1 - Correction of Errors Problem 2

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69 views2 pages

Quiz#1 - Correction of Errors Problem 2

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jaimedejesus
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PHILIPPINE INSTITITUE OF CERTIFIED PUBLIC ACCOUNTANTS - DOHA

Certified Public Accountant Licensure Examination Study Group Batch 11

Subject: Audit Problems Handout Date: 27 September 2024

TOPIC: Correction of Errors

Problem 1
In line with your audit of SB19 MERCHANDISING COMPANY’s financial statements, Mr. Pablo Nase, the
company accountant, presented to you the statement of financial position that follows. Mr. Ken, the company’s
external auditor, reviewed their accounting records and books based thereon. Mr. Ken discovered that the books
of accounts are in agreement with the said statement of financial position as presented below:
SB19 MERCHANDISING COMPANY
BALANCE SHEET
December 31, 2023

ASSETS LIABILITIES AND OWNERS' EQUITY


Cash P 800,000 Trade and Other Payables P 320,000
Trade and Other Receivables 1,600,000 Notes Payable 640,000
Notes Receivable 480,000 Share Capital 1,600,000
Inventories 4,000,000 Retained Earnings 4,320,000
Total 6,880,000 Total 6,880,000

Audit Notes:
1. Further review and investigation of the company’s books revealed the following omissions and errors which
were not corrected during the year of errors:
2020 2021 2022 2023
Unearned Rental Income 60,000 55,800
Accrued Salaries Expense 29,300 12,200 18,600 8,000
Accrued Rental Income 36,300 21,400
2. The company paid a 3-year insurance premium in the amount of P120,000 on March 31, 2020. The entire
amount was debited to expense on that date and no related adjustments were made at year-ends 2020, 2021,
2022, and 2023, respectively.
3. Merchandise costing P72,000 was sold and recorded for P120,000 on December 28, 2022. The merchandise
was shipped on December 29, 2022 FOB Destination, in transit as of December 31, 2022, and was not
included in the endg inventory. The company uses the periodic inventory system.
4. A P60,000 purchased inventory on December 20, 2023 was in transit as of December 31, 2023. The inventory
was purchased FOB shipping point, physical count was made at year-end. The invoice of the merchandise
was received on January 5, 2024, hence, purchase was recorded on said date.
5. A P50,000 routinary repair cost incurred on its equipment at the beginning of 2021 was charged to the
machinery account and was depreciated using the straight-line method over the remaining useful life of the
machinery which was 5 years.
6. No dividends were declared during 2022 to 2023 and no adjustments were made to retained earnings.
The company’s books reported the following net income:
2020 2021 2022 2023
Net Income 520,000 688,000 704,000 720,000

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PHILIPPINE INSTITITUE OF CERTIFIED PUBLIC ACCOUNTANTS - DOHA
Certified Public Accountant Licensure Examination Study Group Batch 11

REQUIRED:
Considering the above audit findings, determine the adjusted amounts of the following: (Disregard tax implications.)
1. What is the correct net income (loss) in 2020?
2. What is the correct net income (loss) in 2021?
3. What is the correct net income (loss) in 2022?
4. What is the correct net income (loss) in 2023?
5. What is the net debit/credit adjustment to Retained Earnings as of January 1, 2023?
6. What is the net adjustment to working capital as of December 31, 2023?
7. Prepare the necessary correcting entries on December 31, 2023.

Problem 2
MAPA CORPORATION has determined its 2022 and 2023 net income figures to be P500,000 and P780,000, respectively.
In a first-time audit of the company's financial statements, you discovered the following errors.

1. Merchandise costing P72,000 was sold for P120,000 on December 28, 2022, but the sale was recorded in 2023. The
merchandise was shipped on December 29, 2022 FOB shipping point and was not included in the ending inventory.
The company uses the periodic inventory system.
2. Office space rental of P25,000 was received in advance in 2022. The amount was credited to a revenue account
when received. Of the P25,000, P5,000 was earned in 2022, P12,000 was earned in 2023 and the remainder will be
earned in 2024.
3. A P32,000 gain on sale of plant assets in 2023 was credited to the retained earnings account.
4. The company paid in advance the two-year insurance premium of its building on April 1, 2021. The whole amount of
P80,000 was debited to expense and no adjustments were made subsequent to that payment date.
5. On November 1, 2022, the company issued at face amount a 5-year 12% bonds payable with a face value of
P300,000. The bonds pay interest annually every November 1. No adjustments were made in 2022 and 2023 with
regards to the bonds.
6. Mathematical error in which P10,000 of amortization on a Patent was recorded at P1,000 at the end of 2023.

Required:
a. Prepare necessary adjusting journal entries on December 31, 2023.
b. Calculate the corrected net income for 2022 and 2023, respectively.

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