Chapter – Errors and their Corrections PROBLEMS 8-1 a b c d e f g h i j k 8.2 2007 net income Understated Overstated Overstated Understated No effect Overstated No effect Overstated Overstated Understated Overstated 2008 net income Overstated Understated Understated Overstated No effect No effect No effect understated Understated Overstated Understated Jay Company Understatement of 12/31/05 inventory Overstatement of 12/31/06 inventory Understatement of 2005 depreciation expense year insurance premium charged to expense in 2005 Unrecorded sale of fully depreciated machine in 2006 Net understatement (overstatement) Understatement (overstatement) 12/31/07 12/31/07 2007 Net Worki Reta incom ng ined e Capita Earn l ings (48,000) (40,500) (40,500) (40,500) (11,500) (110,000) 110,000 110,000 75,000 75,000 75,000 P(123,500) P144,500 P133,000 8-3 Mark Company Reported net income Overstatement of 2006 ending inventory Understated 2006 accrued expenses Unrecognized supplies inventory Corrected net income 2006 P195,000 ( 36,000) ( 40,000) _ P119,000 2007 P210,000 36,000 40,000 15,000 P301,,000 8-4 Jing, Inc Effect on 01/01/08Retained Earnings Understated (Overstated) Understated 2006 ending inventory 5,000 Overstated 2005 depreciation expense 12,500 Understated 2006 depreciation expense ( 4,000) Net understatement in retained earnings P13,500 Retained earnings as of January 1, 2007 should be increased by P13,500 8-5 Resort Company (a) a Prepaid insurance Operating expenses Retained earnings 9,300 3,100 41 12,400 Chapter – Errors and their Corrections b Retained Earnings Trading Securities 16,750 16,750 Trading Securities 24,250 Unrealized Gains on Trading Securities 202,500 – 178,250 = 24,250 c Operating Expenses Allowance for Bad Debts 98,000 – 92,500 = 5,500 d Retained earnings Cost of goods sold 37,750 Cost of goods sold Inventory 49,500 Machinery Operating expenses Retained earnings Accumulated depreciation 75,000 6,250 e 24,250 5,500 5,500 37,750 49,500 68,750 12,500 (b) Reported net income Adjustments: a b c d 2006 P487,500 12,400 (16,750 2007 P550,000 ( 3,100) 24,250 (5,500) (37,750) 37,750 (49,500) 68,750 ( 6,250) P514,150 P547,650 e Corrected net income 8.6 Spade Company 2006 P145,000 (6,500) Reported Net Income (a)Rent income of 2007 recorded in 2006 (b)Omission of unused supplies End of 2005 End of 2006 End of 2007 (c) Omission of accrued salaries End of 2005 End of 2006 End of 2007 Corrected net income 8.7 Lily Corporation Initial amounts Adjustments: Inventory P1,750,000 50,000 20,000 26,000 25,000 30,000 - 2007 P185,000 6,500 (6,500) 3,700 5,500 (7,500) P133,700 Accounts Payable P1,200,000 60,000 42 (3,700) 7,100 7,500 (4,700) P197,700 Net Sales P8,500,000 (35,000) (40,000) - Chapter – Errors and their Corrections Adjusted amounts 2,000 P1,903,000 4,000 P1,264,000 P8,425,000 MULTIPLE CHOICE MC1 MC2 MC3 MC4 MC5 MC6 B C A A B A MC7 MC8 A C MC9 A MC10 MC11 MC12 MC13 MC14 MC15 A D A D C C MC16 MC17 MC18 MC19 MC20 MC21 MC22 MC23 MC24 MC25 MC26 MC27 MC28 MC29 MC30 MC31 MC32 MC33 MC34 MC35 MC36 B B D B C D A A A D D A A A C D C C D D D MC37 MC38 MC39 MC40 MC41 D D B C A MC42 MC43 MC44 B A D 200,000/5 = 40,000 30,000 over + 27,000 over + 7,500 over – 48,000 under = 16,500 net overstatement 27,000 over – 7,500 under – 48,000 under = 28,500 net understatement 27,000 over + 6,000 over – 48,000 under – 7,500 under = 22,500 net understatement 250,000 – 100,000 + 150,000 – 50,000 – (30,000 x 4/6) + (120,000 x 18/24 = 320,000 1,550,000 + 10,000 – 80,000 + 120,000 – 55,000 – 100,000 = 1,445,000 312,500 + 25,000 - 4,000 – 50,000 – 18,000 – 30,000 = 235,500 10,000 – 8,000 = 2,000 net understated 10,000 + 25,000 – 8,000 = 27,000 2004 net income : 8,000 overstated – 2,000 understated ; 2005 net income 8,000 understated – 2,000 overstated 2,300,000 + 60,000 – 40,000 – 50,000 + 100,000 = 2,370,000 10,000 – 7,700 258,000 – 7,700 589,500 – 112,500 – 16,000 613,400 + 90,000 + 12,000 – 28,000 20,000 + 13,500 – 8,000 The shares are treasury shares 300,00 – 80,000 60,000 – 4,000 – 12,000 434,900 + 12,000 60,000 + 15,000 1,500,000 X 12% x 3/12 Retained earnings beginning of 430,000 as reported – correction of prior period errors of P 20,500 ( - 36,000 + 31,500 – 16,000) + 2007 corrected net income of 298,800 2,500,000 – 112,500 – 50,000 – 80,000 1,300,000 – 90,000 – 36,000 + 28,000 500,000 + 7,700 + 30,000 + 18,000 + 8,000 – 4,000 – 16,000 + 15,000 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 30,000 – 4,000 20,000 + 31,500 75,000 + 16,000 43 Chapter – Errors and their Corrections MC45 MC46 MC47 B A C 430,000 – 36,000 + 31,500 – 16,000 950,000 + 36,000 Errata: The question should have been the adjusted amount of 2006 expenses instead of 2004 expenses ; 450,000 – 31,500 + 16,000 Correcting entries in 2007 for Take One Corporation (MC 17 – 47) Operating Expenses Cash 7,700 7,700 Sales 112,500 Accounts receivable 112,500 Inventories Cost of Sales 90,000 90,000 Allowance for Bad Debts Accounts Receivable Operating Expenses Allowance for Bad Debts 30,000 16,000 16,000 30,000 Inventories Accounts Payable 12,000 12,000 Retained Earnings Cost of Sales 36,000 36,000 Cost of Sales Inventories 28,000 28,000 Treasury Stock Investments in Stock 260,000 260,000 Operating Expenses Prepaid Expenses Retained Earnings 31,500 18,000 Operating Expenses Prepaid Expenses 8,000 8,000 13,500 Accumulated Depreciation – Equipment Operating Expenses 4,000 4,000 Sales Accumulated Depreciation – Equipment Loss on Sale of Equipment Equipment 50,000 12,000 18,000 80,000 Interest Expense (Other Losses and Expenses) Interest Payable 150,000 Mortgage Payable Current Portion of Mortgage Payable 44 150,000 500,000 500,000 Chapter – Errors and their Corrections Retained Earnings Operating Expenses 16,000 16,000 Operating Expenses Accrued Expenses 15,000 15,000 Sales 80,000 Advances from Customers 80,000 Working Paper adjustments to restate 2006 financial statements Cost of Sales 36,500 Inventory Prepaid expenses Operating Expenses 36,500 31,500 31,500 Operating Expenses Accrued Expenses 16,000 16,000 Mortgage Payable Current Portion of Mortgage Payable 45 500,000 500,000 ... MC4 MC5 MC6 B C A A B A MC7 MC8 A C MC9 A MC10 MC 11 MC12 MC13 MC14 MC15 A D A D C C MC16 MC17 MC 18 MC19 MC20 MC 21 MC22 MC23 MC24 MC25 MC26 MC27 MC 28 MC29 MC30 MC 31 MC32 MC33 MC34 MC35 MC36 B B... 2,500,000 – 11 2,500 – 50,000 – 80 ,000 1, 300,000 – 90,000 – 36,000 + 28, 000 500,000 + 7,700 + 30,000 + 18 ,000 + 8, 000 – 4,000 – 16 ,000 + 15 ,000 80 ,000 + 18 ,000 + Accrued interest of 15 0,000 * (... 589 ,500 – 11 2,500 – 16 ,000 613 ,400 + 90,000 + 12 ,000 – 28, 000 20,000 + 13 ,500 – 8, 000 The shares are treasury shares 300,00 – 80 ,000 60,000 – 4,000 – 12 ,000 434,900 + 12 ,000 60,000 + 15 ,000 1, 500,000