CHAPTER 11: ERROR CORRECTION;

CASH/ACCRUAL AND
SINGLE ENTRY
FINANCIAL ACCOUNTING REVIEW:
ERROR CORRECTION
(Reference: PAS 8)

Prior Period Errors – omissions, misstatements in the financial statements of prior periods
arising from a failure to use or misuse information that:

(a) was available when financial statements for those periods were authorized
for issue and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial statements.

Prior Period Errors include the effects of mathematical mistakes, mistakes in

applying accounting policies, oversights or misinterpretation of facts and fraud.

The entity shall correct material prior period errors retrospective in the first set of financial
statements authorized for issue after their discovery by restating the net income and retained
earnings of prior period.

TYPES OF ERRORS AS TO ACCOUNTS AFFECTED:

A. INCOME STATEMENT ERRORS – errors affecting at least 2 income statement (nominal)
accounts only, the error in one income statement account is offset by the error in
another income statement account, thus the net income shall not be affected.

B. BALANCE SHEET ERRORS – errors affecting at least 2 balance sheet (real) accounts
only, thus will also have no effect to the net income.

C. MIXED ERRORS –errors affecting at least 1 income statement (nominal) account and at
least 1 balance sheet (real) account, the combination of which results to an erroneous
net income.

TYPES OF MIXED ERRORS (PRIOR PERIOD MIXED ERRORS)

A. COUNTER-BALANCING (OR SELF-CORRECTING ERRORS)
– errors in the profit of Year 1 that when not detected are automatically
counterbalanced in the following accounting period, Year 2. Net income amounts
on the income statements for the 2 consecutive accounting periods, Years 1 and 2,
are inaccurately stated in opposite directions; certain account balances on the
balance sheet at the end of the Year 1 are inaccurately stated, but the account
balances in the balance sheet at the end of Year 2 will be accurately stated.

The following accounts, when misstated are usually conter-balancing:

§ Misstatements of ending inventories
§ Accruals
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o Accrued income (including Receivables/Sales)

o Accrued expense (including Payables/Purchases)
§ Deferrals
o Prepaid expenses (including Advances to suppliers/Purchases)
o Unearned income (including Advances form customers/Sales)

B. NONCOUNTER BALANCING ERRORS

– errors in the profit of Year 1 that, when not detected are not automatically
counterbalanced in Year 2. Profit of Year 2 is correctly stated. Account balances on
Years 1 and 2 balance sheets will be inaccurately stated in the same manner.
– By residual definition, all other mixed errors which affect only the year of
incurrence and will not counterbalance the following year shall be regarded as
noncounter balancing errors. This type of error normally include the capitalization
of non-capitalizable expenditures and expensing a capitalizable expenditures along
with their effects on corresponding depreciation.

GUIDELINES IN SOLVING ERROR CORRECTION PROBLEMS:

- Where the requirement is the EFFECT OF ERRORS TO NET INCOME:

1. Consider all Current Period Error (Counter Balancing* or Non-counter balancing**)

2. Consider all Immediate Prior Year Counter Balancing Errors
3. Ignore all Prior Years’ Non-counter balancing errors

* The effect of a COUNTERBALANCING ERROR to net income of the year of incurrence and
the year following the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET
(e.g. Prepayments, Accrued Income, DIRECT INDIRECT
Inventory, end, AR/Sales)
Counter Balancing Error in a LIABILITY
(e.g. Unearned Income, Accrued INDIRECT DIRECT
expense, AP/Purchases)

** The effect of a NON-COUNTERBALANCING ERROR in net income of the year of incurrence

and the year following the year of incurrence shall be:
NET INCOME OF THE NET INCOME OF THE
YEAR OF INCURRENCE SUBSEQUENT YEAR
Counter Balancing Error in an ASSET DIRECT NO EFFECT
Counter Balancing Error in a LIABILITY INDIRECT NO EFFECT

- Where the requirement is the EFFECT OF ERRORS TO RETAINED EARNINGS, END (AFTER
CLOSING ENTRIES):
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Years’ Non-counterbalancing Errors (as they affected the prior years’
net income)

- Where the requirement is the EFFECT OF ERRORS TO WORKING CAPITAL (CURRENT

ASSETS – CURRENT LIAB)
4. Consider all errors affecting current assets and current liabilities as of the end of the
current period only.

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5. The error in the current asset is DIRECTLY related to the WC (overstated current asset
means overstated WC, and vice versa)
6. The error in the current liability is INVERSELY related to the WC (overstated current
liability means understated WC, and vice versa)

FINANCIAL ACCOUNTING REVIEW:

CASH/ACCRUAL; SINGLE ENTRY
GUIDELINES IN SOLVING CASH/ACCRUAL PROBLEMS:

Cash to Accrual Formula: Sales

Total Cash collection from customers PXX

Add: AR, ending balance PXX
NR-trade, ending balance XX
Advances from customers, beg. balance XX
Sales discounts XX
Sales returns and allowance (no refund) XX
Write-off of receivables XX XX
Total XX
Less: AR, beginning balance (XX)
NR-trade, beginning balance (XX)
Advances from customers, ending bal. (XX)
Recovery of previous write-off (XX) (XX)
Total Accrual Basis Gross Sales XX

The formula for converting records from cash to accrual or accrual to cash is actually derived
from the transaction analysis of the balance sheet account being used as a result of the accrual
basis of accounting (other than cash).

Thus, for sales, the formula is derived from the transaction analysis of the account Accounts
Receivable. Where, applicable, other balance sheet related accounts to sales such as Notes
Receivable – Trade and Advances from Customers, should also be included in the formula
derivation. For simplicity purposes, the accounts receivable and notes receivable are simply
added on the debit side of the T-account (beginning and ending), while the advances from
customer balances (beginning and ending) are kept on the credit side of the T-account.
(receivables being an asset while advances from customers being a liability). The rest are
simple transaction analysis which are either debited or credited to the accounts receivable
account.

Accounts Receivable and

Notes Receivable-Trade Advances from Customers
Beg. Bal (AR/NR) XXX XXX Beg. Bal. (Advanc.)
Sales on Account XX XX Collections
(Accrual basis) (Cash basis)
Recoveries of** XX Sales discounts
prev. write offs XX XX Sales returns*
XX Sales allowances
XX Write offs
End. Bal (AR/NR) XXX XXX End. Bal (Adv)
*excluding refunded sales return to customers.
**included in the analysis only if collections included the said recovery
Cash to Accrual Formula: PURCHASES
Total Cash payments to suppliers PXX
Add: AP, ending balance PXX

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NP-trade, ending balance XX

Advances to suppliers, beg. balance XX
Purchase discounts XX
Purchase returns and allowance (no refund) XX XX
Total XX
Less: AP, beginning balance (XX)
NP-trade, beginning balance (XX)
Advances to suppliers, ending bal. (XX) (XX)
Total Accrual Basis Gross Purchases XX

For purchases, the formula is derived from the transaction analysis of the account Accounts
Payable. Where, applicable, other balance sheet related accounts to purchases such as Notes
Payable – Trade and Advances to Suppliers, should also be included in the formula derivation.
For simplicity purposes, the accounts payable and notes payable are simply added on the credit
side of the T-account (beginning and ending), while the advances to suppliers balances
(beginning and ending) are kept on the debit side of the T-account. (payables being a liability
while advances to suppliers being an asset). The rest are simple transaction analysis which are
either debited or credited to the accounts payable account.
Accounts Payable and
Advances to Suppliers Notes Payable - Trade
Beg. Bal (Advanc.) XXX XXX Beg. Bal (AP/NP)
Payments XX XX Purchase on Acc.
(Cash basis) (Accrual basis)
Purchase discounts XX
Purchase returns* XX
Purchase allowance XX

End Bal. (Adv.) XXX XXX End Balance

*excluding refunded purchase returns from suppliers

Cash to Accrual Formula: OTHER INCOME

Total Cash Collections from Other Income PXX
Add: Accrued Income, ending balance PXX
Unearned Income, beginning balance XX XX
Total XX
Less: Accrued Income, beginning balance (XX)
Unearned Income, ending bal. (XX) (XX)
Total Accrual Basis Other Income XX
In converting other income items (rent income, dividends income, royalty income, etc.) from
cash to accrual, or vice versa, the formula is derived from the transaction analysis of the
account Accrued Income (debit side) and/or Unearned Income (credit side).

Accrued Income/Unearned Income

Beg bal. (Acc Inc.) XX XX Beg bal. (Unear. Inc.)
Recog. Income Collection of cash
(Accrual basis) XX XX (Cash basis)
End bal. (Acc Inc.) XX XX End bal. (Unear. Inc.)

Cash to Accrual Formula: EXPENSES

Total Cash Payments for Expenses PXX
Add: Accrued Expense, ending balance PXX
Prepaid Expense, beginning balance XX XX
Total XX
Less: Accrued Expense, beginning balance (XX)
Prepaid Expense, ending bal. (XX) (XX)
Total Accrual Basis Expense XX

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Finally, in converting operating expenses from cash to accrual, or vice versa, the formula is
derived from the transaction analysis of the account Accrued Expense (credit side) and/or
Unearned Income (debit side).

Prepaid Expense/Accrued Expense

Beg bal. (Prep.) XX XX Beg bal (Acc. Exp)
Payment of cash Recogn. of Exp.
(Cash basis) XX XX (Accrual basis)
End bal. (Prep.) XX XX End bal. (Acc. Exp)

DISCUSSION PROBLEMS

CHAPTER 11-PROBLEM 1:

You have been engaged to audit the accounts of Safari Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
Ommission of: 2016 2017 2018
a. Accrued expenses P15,000 P7,000 P22,000
b. Accrued income 8,000 9,000 5,000
c. Prepaid expense 16,000 12,000 6,000
d. Unearned income 11,000 13,000 10,000

Requirements:

Determine the effect of the errors to:

1. 2016 Net income

2. 2017 Net income

3. 2018 Net income

4. 2018 Retained earnings beginning

5. 2018 Retained earings, ending

6. 2018 Working capital

CHAPTER 11-PROBLEM 2:

You have been engaged to audit the accounts of Masigla Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
2016 2017 2018
a. Ending inventory overstated as a result of
over counting items at year-end. P50,000 P30,000 P40,000
b. Ending inventory understated as a result of
wrong pricing and computational errors 12,000 14,000 8,000

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c. Delivery of merchandise to customers at year-end

recorded as sales only upon collection the
following year 25,000 22,000 16,000
d. Receipt of merchandise from suppliers at year-end
recorded as purchases only upon payment the
following year 15,000 12,000 10,000
e. Major repairs on equipment at the beginning of
each year, charged to repairs expense but
should have been capitalized. Annual
depreciation rate is 10% 200,000 240,000 220,000

Requirements:

Determine the effect of the errors to:

1. 2016 Net income

2. 2017 Net income

3. 2018 Net income

4. 2018 Retained earnings beginning

5. 2018 Retained earings, ending

6. 2018 Working capital

CHAPTER 11-PROBLEM 3:

You have been engaged to audit the accounts of Amici Company for the first time in 2018.
During the audit you discovered the following information.
Year ending December 31,
2017 2018
a. The following were omitted at each year-end:
Salaries payable P12,000 P5,000
Accrued interest income 4,000 3,000
Unearned rental income 14,000 15,000
Prepaid insurance 3,000 5,000
b. Collections from customer at year end, recorded as
sales but deliveries were not made until the
following year 31,000 25,000
c. Payments to suppliers at year end, recorded as
purchases but merchandise were not received
until the following year 10,000 7,000
d. Routinary repairs cost charged to equipment
account at the beginning of each year.
Depreciation rate on fixed asset was at 20% 60,000 80,000
e. Unadjusted net income 245,000 310,000

Requirements:

1. What is the adjusted net income for 2017?

2. What is the adjusted net income for 2018?

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3. What is the retroactive adjustement to the retained earnings at the beginning of 2018?

4. Assuming that annual dividends were paid to stockholders at P75,000, what is the
correct retained earnings at the end of 2018?

5. What is the effect of the errors to the 2018 working capital?

CHAPTER 11-PROBLEM 4:

Solid Company reported in its cash basis financial statements, a total sales of P1,980,000 for
the year ended December 31, 2018. Your audit of the related accounts revealed the following
information:

December 31, 2017 December 31, 2018

Accounts receivable P415,000 P550,000
Allowance for bad debts 25,000 40,000

Additional information:
a. Total discounts taken by customers during the year was at P80,000.
b. Sales returns during the year was at P100,000, P40,000 of which was refunded to
customers since return happened before any collections of receivables.

Required:

1. Assuming that there were no uncollectible accounts were written off in 2018, what is the
accrual basis gross sales for the year?

2. Assuming that the company wrote-off P25,000 and subsequently recovered P20,000,
what is the accrual basis gross sales for the year?

CHAPTER 11-PROBLEM 5:

Deisel Corp. reported total purchases of P2,500,000 in its cash basis financial statement on
December 31. 2018. Additional information revealed the following:
Accounts payable, January 1, 2018 P600,000
Accounts payable, December 31, 2018 800,000
Inventory, January 1, 2018 250,000
Inventory, December 31, 2018 325,000

Additional information:
a. Total discounts taken by the company from suppliers during the year was at P45,000.
b. Purchase returns during the year was at P80,000, P25,000 of which was received as
cash refund from the suppliers since return happened before any payments were made.

Required:

1. What is the accrual basis gross purchases for the year?

2. What is the correct cost of sales for the year?

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CHAPTER 11-PROBLEM 6:

Becker Company assigns some of its patents to other enterprises under a variety of licensing
agreements. In some instances advance royalties are received when the agreements are
signed and, in others, royalties are remitted within 60 days after each license year-end. The
following data included in Becker’s December 31, balance sheets:
December 31, 2017 December 31, 2018
Royalties receivable P90,000 P85,000
Unearned royalties 60,000 40,000

During 2018 Becker received royalty remittances of P200,000. In its income statement for the
year ended December 31, 2018 Becker should report royalty income of:

CHAPTER 11-PROBLEM 7:

XYZ Company acquires patent rights from other enterprises and pays advance royalties in some
cases, and in others, royalties are paid within 90 days after year-end. The following data are
included in XYZ’s December 31, balance sheets:
December 31, 2017 December 31, 2018
Prepaid royalties P55,000 P45,000
Royalties payable 80,000 75,000

During 2018 XYZ remitted royalties of P300,000. In its income statement for the year ended
December 31, 2018, XYZ should report royalty expense of:

CHAPTER 11-PROBLEM 8:

You were assigned to audit the books of BACOLOD CORP. for the period ended December 31,
2018. The bookkeeper of the client provided you the following summarized data taken directly
from its records:

Sales for cash P7,500,000

Total cash collected from charge customers 2,550,000
Cash purchases of merchandise 5,100,000
Credit purchases of merchandise 1,200,000
Expenses paid in cash 2,250,000
Accounts receivable, January 1 750,000
Accounts receivable, December 31 1,200,000
Bad debt expense 100,000
Recovery of bad debts 25,000
Allowance for doubtful accounts, January 1 125,000
Allowance for doubtful accounts, December 31 175,000
Accounts payable, January 1 450,000
Accounts payable, December 31 600,000
Merchandise inventory, January 1 1,500,000
Merchandise inventory, December 31 1,800,000
Accrued expenses, December 31 60,000
Prepaid expenses, December 31 90,000
Furniture and equipment, at cost 3,000,000
Interest received 120,000
Accrued interest income, January 1 30,000
Purchase returns 120,000
Purchase discounts 210,000

Additional information:

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The furniture and equipment which had an estimated useful life of 10 years were
acquired on July 1, 2015 and were estimated to have a 10% salvage value based on cost. The
company uses the double declining balance method in computing the depreciation.

Requirements:

1. What is the correct net sales for the year?

2. What is the correct cost of sales for the year?

3. How much is the correct depreciation expense for the year?

4. What is the net income for the year?

CHAPTER 11-PROBLEM 9:

Cutting Edge Co. is engaged in a small export business. The company maintains limited
records. Most of the company’s transactions are summarized in a cash journal; non-cash
transactions are recorded by making memo entries. The following are abstracted from the
company’s records:
Accounts receivable, increase P1,480,000
Notes receivable, decrease 800,000
Accounts payable, decrease 600,000
Notes payable –trade, increase 800,000
Notes payable – bank, increase 1,200,000
Sales return (P200,000 was refunded) 320,000
Sales discounts 80,000
Purchase returns (P120,000 was refunded) 320,000
Purchase discounts 140,000
Accounts written-off 240,000
Recovery of accounts written-off 72,000
Cash sales 1,200,000
Cash purchases 1,000,000
Cash received from account customers 6,000,000
Cash payment to trade creditors 4,800,000

Requirements:

1. What is the total gross sales on account?

2. What is the total gross sales?

3. What is the total net sales

4. What is the total gross purchases on account?

5. What is the total gross purchases?

6. What is the net purchases?

CHAPTER 11-PROBLEM 10:

Glass Co., organized on March 1, 2018, has a very poor internal control system. The company’s
cashier is also its accountant. After 9 months of operations, the company’s manager suspects

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that the cashier-accountant has been misappropriating company collections. You have been
engaged to audit the company’s accounts to determine the extent of fraud, if any.

You started the audit on November 15. On that date, the cash on hand per your surprise count
was P5,140. Also on that date, the bank confirmed that the balance of the company’s current
account was P26,328. Your examination of the records reveals that a check for P1,852 was
outstanding on November 15. The company’s mark up is 40% of sales.

Further examination of the company’s records reveals the following balances at November 15,
2018:
Ordinary shares P300,000
Share premium from ordinary shares 20,000
Real property purchased for cash 200,000
Mortgage payable 80,000
Furniture and fixtures (of the acquisition cost,
P6,000 remains unpaid as of November 15) 29,000
Notes payable – bank 32,000
Accounts payable – trade 46,284
Expenses paid (excluding purchases) 60,756
Merchandise inventory at cost 93,920
Accounts receivable – trade 85,380
Total sales 340,000

1. How much was paid for inventory purchases?

2. How much was collected from customers?

3. How much is the cash shortage as of November 15, 2018?

CHAPTER 11-PROBLEM 11:

Your audit of Edu Company revealed that your client kept very limited records. Purchases of
merchandise were paid for by check, but most other items were out of cash receipts. The
company’s collections were deposited weekly. No record was kept of cash in the bank, nor was
a record kept of sales. Accounts receivable were recorded only by keeping copy of tickets, and
these copies were given to the customers when paying their accounts.

Audit notes:
a. The company started its operations on January 2, 2018 and issue common stock,
216,000 shares with 100 par, for the following considerations:

Cash P1,800,000
Building, useful life of 15 years 16,200,000
Land 5,400,000

b. An analysis of the bank statements showed total deposits, including original cash
investment, of P12,600,000. The balance in the bank statement on December 31,
2018, was P900,000. but there were checks amounting to P180,000 dated in December
but not paid by the bank until January 2019. Cash on hand on December 31, 2018 was
P450,000 including customers’ deposit of P135,000.

c. During the year, Edu borrowed P1,800,000 from the bank and repaid P450,000 and
P90,000 interest. P30,000 in accrued interest is unpaid by the end of the year.

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d. Disbursements paid in cash during the year were as follows: Utilities, P360,000;
Salaries, P360,000; Supplies, P720,000, and; Dividends, P540,000. Year-end balances
of related accounts are: Utilities payable, P40,000; Salaries payable, P25,000; Unused
supplies, P150,000; Dividends payable, P60,000.

e. An inventory of merchandise taken on December 31, 2018 showed P2,718,000 of

merchandise.

f. Tickets for accounts receivable totaled P3,240,000 but P180,000 of that amount may
prove uncollectible.

g. Unpaid supplier invoices for merchandise amounted to P1,260,000.

h. Equipment with a cash price of P1,440,000 was purchased in early January on one-year
installment basis. During the year, checks for the down payment and all maturing
installments totaled P1,602,000. The equipment has a useful life of 5 years.

Based on the above and the result of your audit, determine the following:

1. Collections from customers in 2018

2. Gross sales, accrual basis in 2018

3. Payments for merchandise purchases in 2018

4. Gross purchases, accrual basis in 2018

5. Cost of goods sold in 2018

6. Net income for the year ended December 31, 2018

MULTIPLE CHOICE EXERCISES

CHAPTER 11-EXERCISE 1:

Bee Co.’s net income for 2016, 2017 and 2018 were P100,000, P145,000 and P185,000;
respectively. The following items were not handled properly.

a. Rent of P6,500 for 2019 was received from a lessee on December 23, 2018, and recorded
as outright income in 2018.

b. Salaries payable at the end of the following years were omitted:

December 31, 2015 2,500

December 31, 2016 5,500
December 31, 2017 7,500
December 31, 2018 4,700

c. The following unused office supplies were omitted in the accounting records:

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December 31, 2015 3,500

December 31, 2016 6,500
December 31, 2017 3,700
December 31, 2018 7,100

d. On January 1, 2016, the company completed major repairs on the company’s machinery
and equipment totaling P220,000, which was expensed outright. The said equipment is 5
years old as of January 1, 2016. As of December 31, 2018, the equipment had an original
cost of P500,000 and a carrying value of P250,000.

1. The correct 2018 depreciation expense is:

a. 31,250 c. 51,250
b. 50,000 d. 70,000

2. The corrected 2016 net income is:

a. 80,000 c. 240,000
b. 234,000 d. 300,000

3. The corrected 2017 net income is:

a. 113,700 c. 126,700
b. 120,200 d. 139,300

4. The corrected 2018 net income is:

a. 184,700 c. 165,600
b. 170,900 d. 164,700

5. The effect of the above errors on the 2018 beginning retained earnings is:
a. 176,200 understatement c. 116,200 understatement
b. 136,200 understatement d. 3,800 overstatement

6. The effect of the above errors on 2018 working capital is:

a. 4,100 understatement c. 8,900 understatement
b. 4,100 overstatement d. 8,900 overstatement

CHAPTER 11-EXERCISE 2:

Log Corp.. reported pretax incomes of P4,545,000 and P3,483,000 for the years ended
December 31, 2017 and 2018, respectively. Your audit however revealed the following errors:

a. Sales for 2017 included a P1,719,000 collection pertaining to a delivery made in January
of 2018 under an FOB Shipping point freight term.

b. Inventory on December 31, 2017 was understated by P388,800 while inventory on

December 31, 2018 was overstated by P255,000.

c. Interest expenses on Bonds for both years were recorded as payments were made
every December 31. The bonds have a face value of P11,250,000 and pay a nominal
interest rate of 6%. They were issued at a discount of P675,000 on January 1, 2016 to
yield an effective interest rate of 7%.

d. Ordinary repairs to equipment had been charged to the Equipment account during 2017
to 2018. Repairs of P382,500 and P423,000 had been incurred in 2017 and 2018,
respectively. In determining depreciation charges, Log uses the double declining
balance method over 10 a ten-year asset useful life. The rate is being applied to the
balance of the asset account at the end of each year.

Requirements:

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1. What is the adjusted pretax income for 2017?

a. 2,978,618. b. 2,973,250 c. 2,838,982 d. 2,842,750

2. What is the adjusted pretax income for 2018?

a. 4,206,295 b. 4,145,095 c. 4,356,640 d. 4,483,495

CHAPTER 11-EXERCISE 3:

The following information pertains to Lot Inc.’s depreciable assets:

a. Equipment XYZ was acquired on January 2015 by exchanging an old delivery van
originally costing P225,000 but with a carrying value on the same date at P75,000. The
new equipment had cash purchase price of P450,000 while the old equipment had a
market value of P50,000. The company paid P400,000 on the trade in, which the
company had debited to the Equipment account, the only entry made by the client
related to the trade in transaction. The equipment had been depreciated over its 10
year useful life using the straight-line method. On January 3, 2018, it had been
ascertained that the equipment had a 5 year remaining useful life.

b. Equipment UVW cost P393,750 and was acquired on January 1, 2016. On the date of
acquisition, the expected useful life was 12 years with no residual value. The straight
line depreciation method was used. On January 2, 2018, it was estimated that the
remaining life of the asset would be 6 years and that there would be an P18,750
residual value. In addition, 150% declining balance method will be used to fairly reflect
the mode of use of the asset.

c. A building was purchased on January 3, 2015, for P4,500,000. The building was
expected to have a useful life of 20 years with no residual value. The straight-line
depreciation method was used. On January 1, 2018, a change was made to the sum-of-
years’ digits method of depreciation. Total life of the asset was estimated to be at 15
years with P50,000 residual value.

Requirements:

1. How much is the adjustment to the accumulated depreciation account and the related
depreciation expense for the current year for the Equipment XYZ?
a. 15,000 and 63,000; c. 165,000 and 56,000
b. 135,000 and 63,000 d. 135,000 and 56,000

2. How much is the depreciation expense for the current year for the Equipment UVW?
a. 82,031 b. 77,344 c. 82,813 d. 87,500

3. What is the book value of the building at December 31, 2018?

a. 3,346,875 b. 3,570,000 c. 3,236,538 d. 3,244,231

CHAPTER 11-EXERCISE 4:

In the course of your examination of the December 31, 2018, financial statements of Insular
Corp, you discovered certain errors that had occurred during 2017 and 2018. No errors were
corrected during 2017. The errors are summarized below:

a. Beginning merchandise inventory (January 1, 2017) was understated by P259,200.

b. Merchandise costing P72,000 was sold for P120,000 to Naval Company on December
28, 2017, but the sale was recorded in 2018. The merchandise was shipped FOB
shipping point and was not included in ending inventory. Insular uses the periodic
inventory system.

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c. A two-year fire insurance policy was purchased on May 1, 2017, for P172,800. The
whole amount was charged to Prepaid Insurance. No adjusting entry was prepared in
2017 and 2018.

d. A one-year note receivable of P288,000 was held by Insular beginning October 1, 2017.
Payment of the 10% note and accrued interest was received upon maturity. No
adjusting entry was made on December 31, 2017.

e. Equipment with a 10 year useful life was purchased on January 1, 2017, for P1,176,000.
No depreciation expense was recorded during 2017 or 2018. Assume that the
equipment has no residual value and that Insular uses the straight-line method for
recording depreciation.

f. The company reported a P1,500,000 net income in 2017 and a P1,750,000 net income
in 2018.

Requirements:

1. What is the net adjustment to the beginning retained earnings account in 2018?
a. 69,600 b. 175,200 c. 127,200. d. 48,000

2. What is the adjusted balance of the net income in 2018?

a. 1,168,800 b. 1,512,400 c. 1,538,800. d. 1,418,800.

CHAPTER 11-EXERCISE 5:

You were engaged by Kuting Corp. to audit its financial statements for the first time. In
examining the company’s books, you discovered that certain adjustments had been overlooked
at the end of 2017 and 2018. Moreover, you also discovered that other items had been
erroneously recorded. The said omissions and other failures for each year are noted below:

2017 2018
Prepaid insurance 256,000 205,200
Accrued salaries and wages 582,400 520,000
Accrued interest income 172,800 142,000
Advances from customers 313,600 374,000
Capital expenditures charged as repairs expense 376,000 348,000

Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized
as advances from customers because goods were not shipped until the following year.

b. Capital expenditures had been recorded as repairs but should have been charged to the
Machinery account; the depreciation rate is 10% per year, but depreciation in the year
of expenditures is to be recognized at 5%.

Based on the above and the result of your audit, answer the following:

1. What is the total effect of the errors on the 2018 net income?
a. Understated by 251,000 c. Understated by 213,400
b. Overstated by 216,200 d. Overstated by 253,800

2. What is the total effect of the errors on the company’s working capital as of December 31,
2018?
a. Understated by 202,200 c. Understated by 177,200
b. Overstated by 79,600 d. Overstated by 546,800

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3. If remained unadjusted, what will be the effect of the errors to the company’s December 31,
2018 accumulated profits?
a. Understated by 103,400 c. Understated by 177,200
b. Overstated by 620,600 d. Overstated by 570,600

CHAPTER 11-EXERCISE 6:

The income statement of GHI Inc. showed the following net income:
2017 P1,750,000
2018 2,000,000

An examination of the accounting records for the year ended December 31, 2018 revealed that
several errors were made. The following errors were discovered:

a. Salary accrued at year-end were consistently omitted:

2017 P100,000
2018 140,000

b. The footings and extensions showed that the inventory on December 31, 2017 was
overstated by P190,000.

c. Prepaid insurance of P120,000 applicable to 2019 was expensed in 2018.

d. Interest receivable of P20,000 was not recorded on December 31, 2018.

e. On December 26, 2018 an equipment costing P400,000 was sold for P220,000. At the
date of sale, the equipment had an accumulated depreciation of P240,000. The cash
received was recorded as miscellaneous income in 2018.

f. A building which had a fair value of P1,200,000 was accepted from the city government
as a donation on January 1, 2017. The building that was estimated to be useful for
another 10 years was to be used as a factory site as a condition on the grant. Legal
fees incurred in relation to the donation was at P100,000 and was charged to 2017
operating expenses. Another P200,000 was incurred to remodel and renovate the
building prior to use. The building was capitalized at P200,000 (renovation cost) and
was depreciation over remaining life using straight line.

Requirements:
1. What is the correct net income in 2017?
a. 1,550,000 c. 1,490,000
b. 1,520,000 d. 1,430,000

2. What is the correct net income in 2018?

a. 2,120,000 c. 1,990,000
b. 2,000,000 d. 1,950,000

3. What is retroactive adjustment to the 2019 beginning retained earnings?

a. 80,000 c. 200,000
b. 160,000 d. 320,000

4. What is the correct carrying value of the building as of December 31, 2018?
a. 240,000 c. 1,120,000
b. 960,000 d. 1,200,000

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CHAPTER 11-EXERCISE 7:

You were assigned to audit for the first the time the financial statements of Baby Inc. as of and
for the year ended December 31, 2018. Baby Inc. is a merchandiser of office and school
supplies and has started operations in early 2016. No audit has been made on its financial
statements from its inception. The following was as a result of your audit investigations:

The retained earnings general ledger entries from 2016 to current year appears below:
Date Particulars Debit Credit Balance
12/31/16 Net Income P600,000 P600,000
7/1/17 Land donated by a 400,000 1,000,000
stockholder at fair value
12/31/17 Net Income 750,000 1,750,000
4/2/18 Loss on inventory due to P50,000 1,700,000
flood
12/31/18 Net Income 300,000 2,000,000

Audit notes:
a. The following were omitted at each year end:
2016 2017 2018
Accrued operating expenses P90,000 P110,000 P98,000
Accrued rental income 40,000 45,000 50,000
Prepaid advertising expense 20,000 30,000 35,000

b. The following equipment acquisitions were erroneously charged to repairs and

maintenance expense account each year. It is the company’s policy to depreciated
equipment using straight-line method over 5 years. Moreover, full years depreciation is
charged on the year of acquisition, none on the year of disposal.
2016 2018
Equipment acquisitions charged to P400,000 P550,000
repairs and maintenance expense

c. Cash dividends declared and paid for each year were charged to other operating
expenses.
2016 2017 2018
Dividends declared and paid P100,000 P150,000 P200,000

Requirements:
1. What is the correct net income in 2016?
a. 890,000 c. 990,000
b. 850,000 d. 950,000

2. What is the correct net income in 2018?

a. 882,000 c. 682,000
b. 832,000 d. 632,000

3. What is the retroactive adjustment to the retained earning beginning balance in 2018?
a. 250,000 credit c. 125,000 debit
b. 150,000 credit d. 195,000 debit

4. What is the adjusted retained earnings at the end of 2018?

a. 2,187,000 c. 2,287,000
b. 2,227,000 d. 2,587,000

5. What is the effect of errors to the 2018 working capital?

a. 13,000 overstated c. 25,000 understated
b. 15,000 understated d. 23,000 overstated

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CHAPTER 11-EXERCISE 8:

The income statements of Roxas Inc. indicate the following net income:
2016 P1,500,000
2017 1,750,000
2018 2,000,000

An examination of the accounting records for the year ended December 31, 2018 indicates that
several errors were made. The following errors were discovered:

a. Salary accruals on December 31, were consistently omitted:

2015 P95,000
2016 110,000
2017 100,000
2018 140,000

a. The footings and extensions showed that the inventory on December 31, 2017 was
overstated by P190,000.

b. P150,000 worth of inventories were received on January 4, 2019. Upon investigation

you discovered that these goods were shipped by the supplier on December 30, 2018
FOB Shipping point. Further investigation revealed that liability on the item were
recorded when the goods were received.

c. Prepaid insurance were consistently omitted at the end of each year:

2015 P75,000
2016 100,000
2017 115,000
2018 120,000

a. Interest receivable were not recorded on December 31 of the following years:

2016 P20,000
2017 25,000
2018 30,000

a. On January 1, 2018 an equipment costing P400,000 was sold for P220,000. At the date
of sale the equipment had accumulated depreciation of P240,000. The cash received
was recorded by the company as miscellaneous income.

b. You also discovered that on July 1, 2016, the company completed the construction of
the left wing of its factory building incurring a total cost of P750,000, which it had
charged to repairs expense. The said building has been used in operations for 5 years
as of July 1, 2016 and its life was unaffected by the extension. The building which had
an original cost of P3,000,000 had an accumulated depreciation of P1,125,000 as of
December 31, 2018.

Required:

1. What is the correct depreciation expense in 2018?

a. 150,000 c. 200,000
b. 175,000 d. 187,500

2. What is the correct net income in 2016?

a. 2,365,000 c. 2,255,000
b. 2,235,000 d. 2,230,000

3. What is the correct net income in 2017?

a. 1,540,000 c. 1,640,000

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b. 1,590,000 d. 1,690,000

4. What is the correct net income in 2018?

a. 2,100,000 c. 2,050,000
b. 2,000,000 d. 1,950,000

CHAPTER 11-EXERCISE 9:

You are performing, for the first time, the audit for the year ended December 31, 2018 of GKNB
CORP. financial statements. The company reported the following amounts of net income for the
years ended December 31, 2016, 2017 and 2018:

2016 P381,000
2017 450,000
2018 385,500

During your examination, you discovered the following errors:

a. You observed that there were errors in the physical count: December 31, 2017
inventories were understated by P42,000 and December 31, 2018 were overstated by
P69,000.

b. On December 30, 2018, GKNB recorded on account, merchandise in transit which cost
P45,000. The merchandise was shipped FOB Destination and had not arrived by
December 31. The merchandise was not included in the ending inventory.

c. Accrual sales at each year end were consistently omitted as follows:

2016 P12,000
2017 15,000
2018 10,500

d. Accrual of salaries were also consistently omitted as follows:

December 31, 2016 30,000
December 31, 2017 42,000

e. On March 5, 2017, a 10% stock dividend was declared and distributed. The par value of
the shares amounted to P30,000 and market value was P39,000. The stock dividend
was recorded as follows:
Other expense 30,000
Ordinary shares 30,000

f. On July 1, 2017, GKNB paid a three-year rent. The three-year premium of P18,000 was
paid on that date, and the entire premium was recorded as rent expense.

g. On January 1, 2018, GKNB retired bonds with a book value of P360,000 for P318,000.
The gain was deferred and amortized over 10 years as a reduction of interest expense
on other outstanding bonds.

Requirements:

1. What is the correct net income in 2016?

a. 399,000 b. 363,000 c. 351,000 d. 339,000

2. What is the correct net income in 2017?

a. 477,000 b. 498,000 c. 528,000 d. 534,000

3. What is the correct net income in 2018?

a. 313,200 b. 388,800 c. 393,000 d. 418,800

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4. What is the retroactive adjustment to the beginning retained earnings in 2018 to correct the
prior years’ errors?
a. 21,000 cr. b. 21,000 dr. c. 69,000 dr. d. 69,000 cr.

5. What is the adjusting entry in 2018 to correct the error in item e above?
a. Accumulated profits 39,000
Other expense 30,000
Share premium 9,000

b. Accumulated profits 30,000

Accumulated profits 30,000

c. Accumulated profits 9,000

Share premium 9,000

d. no adjustment is necessary

CHAPTER 11-EXERCISE 10:

You are auditing the financial statements of WWEE Company. The company’s accountant
provided you with the following comparative statements of income and accumulated profits for
the years 2018 and 2017:
2018 2017
Sales 6,000,000 4,500,000
Cost of goods sold (2,800,000) (2,400,000)
Gross income 3,200,000 2,100,000
Operating expenses (1,500,000) (1,800,000)
Net profit 1,700,000 300,000

Accumulated profits, beg 1,150,000 1,000,000

Net profit 1,700,000 300,000
Dividends paid (500,000) (150,000)
Accumulated profits, end 2,350,000 1,150,000

Audit notes:
a. The management, with your concurrence, opined that changing the company’s
inventory costing from FIFO to Weighted Average is justified as it will present a more
relevant and reliable financial information given the prevailing current circumstance.
The following summarizes the inventory costs at year end under both methods:
2018 2017
FIFO 625,000 727,500
Weighted Average 715,000 827,500

The said change has not been implemented by the accountant as of the audit period.

b. The company decided to change its method of depreciation from the double declining
balance method to the straight line. The depreciable assets had a 10 year useful life
and has been depreciated for five years at the end of 2017. The salvage value of the
said assets was estimated to be P50,000. Expenses in the income statements included
P350,000 and P437,500 depreciation expenses in 2018 and 2017, respectively,
computed based on double declining balance method.

c. On August 31, 2017, the company started the construction of a building it plans to use
as a second factory. As of the current balance sheet date, the construction is yet to be
done. Total accumulated costs incurred on the construction and recorded in its
Construction-in-progress account, amounted to P1,250,000, which excluded a P25,000

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borrowing cost in 2017 which has been charged to expense. You have ascertained that
such borrowing cost should have been capitalized following the PAS 23. Actual
borrowing cost in 2018 amounted to P75,000 which have been charged to expense.

Answer the following questions based on the above information:

1. What is the restated net income in 2017 to be presented in the comparative income
statements?
a. 425,000 b. 400,000 c. 300,000 d. 275,000

2. What is the correct net income in 2018?

a. 1,700,000 b. 1,685,000 c. 1,775,000 d. 1,610,000

3. What is the adjusted accumulated profits balance at the beginning of 2018?

a. 1,025,000 b. 1,075,000 c. 1,225,000 d. 1,275,000

4. What is the adjusted accumulated profits at the end of 2018?

a. 2,425,000 b. 2,385,000 c. 2,550,000 d. 2,885,000

5. What is the necessary adjusting entry a result of the change described in item c?
a. No adjustment necessary

b. Interest expense 25,000

Retained earnings 25,000

c. Construction in progress 100,000

Retained earnings 25,000
Interest expense 75,000

d. Construction in progress 100,000

Interest expense 100,000

CHAPTER 11-EXERCISE 11:

Kris Company presented to you the following income statement in line with the same company’s
audit of the financial statements:

KRIS COMPANY
INCOME STATEMENT
For the Year Ended December 31, 2018

Sales P10,350,000
Cost of Goods Sold 7,050,000
Gross profit P3,300,000
Operating expenses:
Selling P675,000
Administrative 1,050,000 1,725,000
Net income P1,575,000

Your audit disclosed the following information:

• Accounts receivable decreased P540,000 during the year.

• Prepaid expenses increased P255,000 during the year.

• Accounts payable to suppliers of merchandise decreased P412,500 during the year.

• Accrued expenses payable decreased P150,000 during the year.

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• Administrative expenses include depreciation expense of P90,000.

• Inventories decreased by P450,000.

Requirements:

1. What is the total amount of cash received form customers during the year?
a. 10,980,000 c. 9,810,000
b. 10,350,000 d. 10,477,500

2. What is the total amount of cash paid to suppliers during the year?
a. 6,600,000 c. 7,012,500
b. 7,912,500 d. 6,187,500

3. What is the total amount of cash paid for operating expenses during the year?
a. 1,740,000 c. 2,130,000
b. 1,530,000 d. 2,040,000

4. What is the net amount of cash provided by operating activities?

a. 1,492,500 c. 1,747,500
b. 1,837,500 d. 1,575,000

CHAPTER 11-EXERCISE 12:

Porter Company is in its first year of operation and is using the cash basis of accounting. The
company presented the following cash receipts and disbursement records for 2018:

Cash receipts P384,000

Cash disbursements (247,500)
P136,500

The management requested you to compute its income under accrual basis.

The following information are deemed relevant in your analysis:

a. Depreciation of plant assets for 2018 computed by the straight-line method is P31,500.

b. Prepaid insurance of P5,400, two-thirds of which relates to 2019, is included in the 2018
cash disbursement figure. This amount was recognized as insurance expense when it
was paid.

c. Porter Company received P36,000 in advance rent for space in its building. The entire
amount is included in the cash receipts figure and was recognized as rent revenue when
received. However, P21,000 of it was for space that will be provided in 2019.

d. Employees are due P8,400 at the end of 2018.

e. Interest amounting to P9,510 from investments is receivable at the end of 2018.

f. You estimate that your 2018 fee for accounting services that have not been billed will be
P1,500.

Requirements:

1. What is the correct net income under the accrual basis of accounting?
a. 88,710 b. 87,210 c. 77,700 d. 68,190

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2. What is the total liabilities to be reported as of the balance sheet date under the accrual
basis?
a. 34,500 b. 44,010 c. 40,410 d. 30,900

CHAPTER 11-EXERCISE 13:

You are auditing the financial statements of UKG INC. for the year ended December 31, 2018.
The company maintains its books on a semi-accrual and semi-cash basis. Purchases and sales
are recognized on an accrual basis while other operating expenses are kept on cash basis. The
company bookkeeper presented to you a draft of its income statements for the year under
audit:

Sales P600,000
Cost of sales 360,000
Gross profit P240,000
Depreciation expense (29,000)
Other expenses (166,000)
Interest expense (20,000)
Net income P25,000

Your investigation revealed the following information:

a. On January 1, 2018, UKG issued P200,000, 10%, 10 year bonds when the market rate
of interest was 8%. Interest is payable on June 30 and December 31.

b. All purchases of inventory are on account and other expenses reflect those expenses
paid in cash during the period.

c. The company had open invoice (unpaid invoices) from suppliers amounting to P120,000
on December 31, 2018 and P116,000 on January 1, 2018.

d. The company had outstanding invoices (uncollected invoices) to customers amounting

to P96,000 on January 1, 2018 and P110,000 on December 31, 2018.

e. Inventory taking at the end of each year revealed that inventory on hand on December
31, 2003 amounted to 186,000 while inventory on December 31, 2018 was at
P174,000.

f. Accrued utilities at the beginning and at the end of the year amounted to P5,000 and
7,000, respectively while prepaid rentals at the beginning and at the end of the year
amounted to P10,000 and 14,000, respectively.

Based on the information available and as a result of your audit, determine the following:

1. How much was paid for inventory purchases?

a. 344,000 b. 348,000 c. 368,000 d. 372,000

2. How much was received from customers in 2018?

a. 490,000 b. 566,000 c. 586,000 d. 614,000

3. What is the carrying value of the bonds payable on December 31, 2018?
a. 225,318 b. 226,267 c. 226,840 d. 227,180

4. What is the correct interest expense in 2018?

a. 21,862 b. 20,000 c. 19,087 d. 18,138

5. What is the correct net income in 2018?

a. 26,862 b. 28,862 c. 29,718 d. 46,000

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CHAPTER 11-EXERCISE 14:

You were able to gather the following in connection with our audit of the Wowie Corp. for the
year ended December 31, 2018:
December 31, 2017 December 31, 2018
Accounts receivable P6,400,000 P4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising expense 14,250 40,000
Prepaid insurance 25,000 0
Unexpired insurance 0 41,000

During the year:

• Amount collected from customers, P10,000,000
• Total payments to suppliers of merchandise, P13,618,000
• Total payments to suppliers of merchandise of prior years, P4,632,000
• Wages paid, P3,050,000
• Advertising paid which includes, P300,000
• Insurance premium paid, P125,000

Requirements:

1. Total sales for 2018 under accrual basis

a. 6,400,000 b. 12,400,000 c. 7,600,000 d. 14,000,000

2. Total purchases for 2018 under accrual basis

a. 11,607,000 b. 15,629,000 c. 13,618,000 d. 16,239,000

3. Accrual wages expense for 2018

a. 3,010,000 b. 3,090,000 c. 3,100,000 d. 3,140,000

4. Accrual advertising expense in 2018

a. 245,750 b. 285,750 c. 260,000 d. 300,000

5. Accrual insurance expense in 2018

a. 84,000 b. 109,000 c. 100,000 d. 141,000

CHAPTER 11-EXERCISE 15:

An analysis of incomplete records of Journey Corporation produced the following information

applicable to 2018:

ACCOUNT INCREASES
Cash 4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000
Prepaid insurance 200,000

ACCOUNT DECREASES
Inventory 1,000,000
Equipment 100,000
Notes receivable 600,000
Accrued salaries payable 300,000

Summary of cash transactions were as follows:

RECEIPTS:
Cash sales 3,000,000

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Collections on accounts receivable 30,000,000

Collections on notes receivable 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 500,000

DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000

Additional information:
a. Total purchase returns and allowances amounted to P800,000

b. Total sales returns and allowances amounted to P1,200,000.

Required: Determine the audited balances of the following:

1. Net sales
a. 35,800,000 c. 36,600,000
b. 36,200,000 d. 37,000,000

2. Net purchases
a. 17,900,000 c. 17,400,000
b. 17,700,000 d. 17,000,000

3. Cost of sales
a. 18,000,000 c. 18,700,000
b. 18,400,000 d. 18,900,000

4. Depreciation expense
a. 100,000 c. 900,000
b. 800,000 d. 1,000,000

5. Net income
a. 5,000,000 c. 5,200,000
b. 5,150,000 d. 5,900,000

CHAPTER 11-EXERCISE 16:

Alaska Inc. uses the direct method in preparing its statement of cash flows. The trial balance for
the 2018 and 2017 are presented as follows:

December 31, 2018 December 31, 2017

Debit Credit Debit Credit
Cash P315,000 P288,000
Accounts receivable 297,000 270,000
Allowance for bad debts P11,700 P9,900
Inventory 279,000 423,000
Property, plant, and equipment 900,000 855,000
Accumulated depreciation 148,500 135,000
Unamortized bond discount 40,500 45,000
Accounts payable-trade 225,000 139,500
Income tax payable 189,000 261,900

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Deferred tax liability 47,700 41,400

8%, Bonds payable 405,000 180,000
Ordinary share capital 450,000 360,000
Share premium 81,900 67,500
Retained earnings 402,300 581,400
Sales 4,849,200 7,008,300
Cost of Sales 2,250,000 3,420,000
Selling expense 1,273,500 1,548,000
General and administrative expense 1,233,000 1,361,700
Interest expense 38,700 23,400
Income tax expense 183,600 550,800
Total 6,810,300 6,810,300 8,784,900 8,784,900

Audit notes:
A. Alaska Inc. purchased additional equipment during the year for cash at P45,000.

B. One-thirds of the depreciation expense is attributable to selling expense with the

balance to general and administrative expense.

C. Bad debt expense in 2018 was at P45,000. During the year, uncollectible accounts
amounting to P43,200 were written off. The company reports bad debts as selling
expenses.

Requirements:

1. How much is the total cash collected from customers in 2018?

a. 4,919,400 c. 4,734,000
b. 4,821,000 d. 4,779,000

2. How much is the total cash payments to suppliers of merchandise in 2018?

a. 2,191,500 c. 2,479,500
b. 2,020,500 d. 2,106,000

3. How much is cash payments made for interests in 2018?

a. 34,200 c. 66,600
b. 2,400 d. 43,200

4. How much is the cash payments made for selling expenses in 2018?
a. 1,228,500 c. 1,269,000
b. 1,215,000 d. 1,224,000

CHAPTER 11-EXERCISE 17:

Alamat Company began business operations on January 1, 2018. During 2018, the accounting
records are kept on a double entry system but on the cash basis accounting.

On December 31, 2018, the trial balance prepared from these records appeared as follows:

Cash 840,000
Purchases 4,200,000
Expenses 560,000
Notes payable 200,000
Sales 4,400,000
Share capital 1,000,000
Total 5,600,000 5,600,000

The management decided to use the accrual basis and other date as of December 31 are as
follows:

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a. The merchandise inventory on December 31, at cost, P500,000

b. On December 31, accounts receivable amounted to P100,000 and accounts payable
totalled P80,000
c. Accrued expenses on December 31, P20,000
d. The purchases included merchandise in the amount of P10,000 bought for the president.
The president had not reimbursed the company.
e. Included in the sales was P25,000 deposit given by a customer for merchandise to be
delivered in 2019.
f. It is estimated that 5% of the outstanding receivables on December 31, may turn out to
be uncollectible.
g. Expenses include the following:
- P25,000 for office supplies of which P5,000 is still unused as of December 31.
- P100,000 for the purchase of equipment on July 1, 2018. It was estimated that this
property would have an estimated useful life of 10 years without residual value.
- P20,000 for a one-year insurance premium on a fire insurance policy dated October
1, 2018.
h. The notes payable balance consist of two notes; a non-interest bearing note of
P100,000, dated August 1, 2018 due on February 1, 2019 and a one-year note of
P100,000, dated September 1, 2018, bearing an interest of 12% payable at maturity.

Required: Determine the audited balances of the following:

1. Net sales
a. 4,400,000 c. 4,500,000
b. 4,475,000 d. 4,525,000

2. Net purchases
a. 4,280,000 c. 4,200,000
b. 4,270,000 d. 4,190,000

3. Cost of sales
a. 3,780,000 c. 3,700,000
b. 3,770,000 d. 3,690,000

4. Net income
a. 236,000 c. 231,000
b. 240,000 d. 250,000

CHAPTER 11-EXERCISE 18:

The bookkeeper/cashier of Titanium Company is suspected to have been misappropriating cash

of the company. You were called upon to ascertain, if possible, the shortage with which the said
employee may be charged.

You obtain the following information form the available subsidiary journals, ledgers, and other
data.

Balances at close of business, April 16, 2018:

Accounts receivable 1,327,650
Accounts payable 621,900
Cash in banks per bank statement 296,490

Transactions, January 1 – April 14, 2018:

Sales, per receivable clerk 17,628,510
Cash sales None
Sales allowances in customers’ accounts 54,990
Cash purchase of furniture, per dealer’s invoice 9,000

394 AUDITING/Espenilla; Macariola

 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY

Total merchandise purchases on accounts 10,845,780

Expenses paid, supported by paid invoices and payrolls 5,597,490
Cash dividend declared, P150,000 (of which, P30,000
remains unpaid) 120,000

A check for P300,000 had been cashed by the bookkeeper shortly before the audit. Although
the signature on the check had been obviously forged, it was paid by the bank and returned
with other canceled checks.

A statement of financial position prepared from the books and other files follows:

Titanium Company
Statement of Financial Position
December 31, 2017:

ASSETS
Cash P98,010
Accounts receivable 678,690
Inventory (cost) 1,321,050
Furniture P223,680
Accumulated depreciation (95,400) 128,280
Total Assets P2,226,030

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable P344,160
Share capital 1,500,000
Accumulated profits 381,870
Total Liabilities and Stockholders’ Equity P2,226,030

Required:
1. What is the total amount paid for merchandise purchases?
a. 10,845,780 b. 9,879,720 c. 10,568,040 d. 11,123,520

2. What is the total amount of collections from sales?

a. 16,924,560 b. 16,979,550 c. 18,222,480 d. 18,277,470

3. What is the total amount of cash disbursements from January 1 to April 16?
a. 16,572,270 b. 15,606,210 c. 16,294,530 d. 16,297,530

4. What is the cashier’s accountability (correct cash balance before shortage) on April 16,
2018?
a. 728,040 b. 296,490 c. 431,550 d. 131,550

5. What is the amount of cash shortage chargeable against the cashier?

a. 300,000 b. 131,550 c. 431,550 d. 728,040

AUDITING/Espenilla; Macariola 395