Ap.m-1401-Correction of Errors
Ap.m-1401-Correction of Errors
Ap.m-1401-Correction of Errors
M-1401
Correction of Error
Straight Problems
Problem 1
You were able to gather the following in connection with your audit of Russell Inc. for the year
ended December 31,2013:
Problem 2
Azraels Garden, a calendar year sole-proprietorship, maintained its books on the cash basis
during the year.
Azrael is in the process of negotiating a bank loan to finance the planned expansion of its
business. The bank is requesting 2014 financial statements prepared on the accrual basis of
accounting from Azrael. As Azreals external auditor, you were called upon to assist in preparing
the financial statements. The following information were obtained during the course of your
engagement:
Azraels Garden
TRIAL BALANCE
December 31, 2014
Debits Credits
CashP448,000
Accounts Receivable,12/31/13 283,500
Inventory,12/31/13 1,085,000
Furniture and Fixtures 2,068,500
Leasehold improvements 787,500
Accumulated Depreciation,12/31/13 P567,000
Accounts Payable 297,500
Azraels Drawings -
Azraels capital 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries Expense 3,045,000
Taxes and Licenses 217,000
Insurance expense 152,250
Rent Expense 598,500
Utilities expense 220,500
Living expenses 227,500 _________
P14,472,500 P14,472,500
h. Azrael is being sued for P4,000,000. The coverage under the comprehensive insurance
policy is limited to P2,500,000. Azraels attorney belives that an unfavorable outcome is
probable and that a reasonable estimate of the settlement is P3,000,000.
i. The salaries account includes P40,000 per month paid to the proprietor. Azrael also
receives P4,375 per week for living expenses.
Required:
Detremine the amount to be reported for the following items in Azraels financial statements as
of and for the year ended December 31,2014 under accrual basis of accounting. (Disregard
income taxes)
Problem 3
The following data are obtained from the single entry records kept by Joshu Merchandising for
2013:
December 31 January 1
Payments
Accounts Payable 1,520,000
Notes payable 1,280,000
Cash purchases 600,000
Interest Expense 160,000
Expenses 800,000
Equipment 400,000
Withdrawals by owner 400,000 5,160,000
Balance, December 31 P1,600,000
Audit Notes:
Accounts receivable of P120,000 was written off as uncollectible.
Returns of P320,000 were on merchandise sales.
Allowances for P80,000 were received in merchandise purchases.
Required:
Determine the audited balances of the following:
1. Net Sales P6,080,000
2. Net Purchases P3,000,000
3. Cost of Sales P3,640,000
4. Rent Income P160,000
5. Interest expense P 120,000
6. Depreciation expense P380,000
7. Net Income P1,320,000
Problem 4
When the records of Merlita Merchandising Company were reviewed at the close of 2013, the
errors listed below were discovered.
1. For each item, indicate the effects of each of the following errors by writing O for
overstatement, U for understatement and X for no effect in the appropriate column.
2012 2013
Re, Re,
RE,before after RE,before after
NI Asset Liability closing closing NI Asset Liability closing closing
2012 2013
Re, Re,
RE,before after RE,before after
NI Asset Liability closing closing NI Asset Liability closing closing
Required:
1. Correct net income in 2013. P1,550,000
2. Correct net income in 2014. 2,120,000
3. What is the retroactive adjustment to the 2015 beginning retained earnings ? 80,000
Increase
4. What is the net effect of errors to the 2014 working capital? 0
5. What is the correct carrying value of the building as of December 31,2014? 1,200,000
Problem 6
The income statement of Japhet Company for the years ended December 2013,2014,2015
indicate the following net income:
2013 170,000
2014 205,000
2015 186,000
An examination of the accounting records for three years indicates that several errors were made
in arriving at the net income amounts reported. The following errors were discovered.
a. Sale of merchandise on account amounting to 15,000 was not recorded at the end of
2014.
b. Goods costing P8,000 were in transit from a supplier on December 31,2013. The ggods
were appropriately included in the ending inventory but the corresponding purchase was
not recorded.
c. Accrued salaries were consistently omitted from the records. The amounts omitted were:
2013 P10,000
2014 14,000
2015 16,000
d. The merchandise inventory at December 31,2014 was understated by P9,000 as the result
of errors made in the footings and extensions on inventory sheets.
e. Unexpired insurance of P12,000 applicable tp 2014 was expensed in 2013.
f. Interest receivable of P2,400 was not recorded on December 31,2014.
g. On January 2,2014, a piece of equipment costing p40,000 was solf for p18,000. At the
date of sale, the equipment had an accumulated depreciation of P24,000. The cash
received was recorded as income in 2014. In addition, depreciation was recorded for this
equipment in both 2014 and 2015 at the rate of 10% of cost.
Required:
Compute the adjusted net income from 2013 t0 2015.
2013 164,000
2014 211,400
2015 161,600
Problem 7
You are auditing the financial statement of Ariel Company for the first time. You have
discovered that the merchandise inventory at the end of each year was understated by P100,000
and P200,000 in 2013 and 2014 respectively.
In addition in inspecting the record of the company, you discovered that some items had been
improperly recorded and that certain yearend adjustments had been overlooked in 2013 and
2014. These omissions and other errors for each summarized as follows:
12/31/2013 13/31/2014
Accrued Salaries 780,000 873,600
Accrud interest income 213,000 259,200
Prepaid Insurance 307,800 384,000
Advances form customers 561,000 470,400
(collections from customers had
been recorded as sales but should
have been recognized as
advances form customers
because goods were not shipped
until the followin year.)
Machinery (Capital expenditures 522,000 564,000
had been recorded as repairs but
should have been charged to
machinery;the depreciation rate
is 10% per year, but depreciaton
in the year of expenditure is to be
recognized at 5%)
Required:
Based on the above data and the result of your audit, provide the following:
1. Total effects of errors on 2013 net income. 65,000 overstated
2. Total effects of errors on the 2014 net income. (420,000) understated
3. Total effect of errors on the balance of the companys retained earnings at December
31,2014?
(355,100) Understated
4. What is the effect of the 2013 errors in the 2014 net income? (544,000) understated
5. What is total effect of errors on the companys working capital at December 31,2014?
620,200 overstated
6. The necessary adjusting entry for the error in recording capital expenditures on
Machinery as of December 31,2013.
Machinery 564,000
Deprecation expense 56,400
Accumulated deprecation 84,600
Retained earnings 535,800
Required:
Based on the above and the result of your audit, determine the following: (disregard income
taxes)
1. Payment for merchandise purchases in 2014
a. P2,646,000 c. P2,436,000
b. P2,586,000 d. P3,246,000
2. Collections from sales in 2014
a. P3,720,000 c. P4,320,000
b. P3,000,000 d. P4,920,000
3. Net income for the year ended December 31,2014
a. P1,560,000 c. P1,770,000
b. P1,620,000 d. P960,000
4. Shareholders equity as of December 31, 2013
a. P9,180,000 c. P9,390,000
b. P9,240,000 d. P8,580,000
5. Total assests as of December 31, 2014
a. P9,540,000 c. P9,450,000
b. P9,583,200 d. P9,390,000