Name: Ernie Jane G.

Villanueva Date: March 12,2022

Topic #6: Others Topic-Errors

Objectives:

Effect on profit of omission of accruals and deferrals TACKELD!

Effect on profit of omission of trade A/R & advances from customer
Effect on profit of omission of trade A/P
Effect on profit of erroneous inventory
Effect on profit of non counter balancing errors
Effect on working capital of error on current asset and current liability

Lets start:

Jane paid you in rent in advanced. So that is your unearned income, right? That rent is applicable in
July 1 this period up to July 1 in a next year period. But The company’s doing is like this:

“OMISSION (UNDERSTATEMENT) OF ACCRUALS & DEFERRALS”

Omission of Entry when paid Correct adjusting Profit on the year Profit the
or collected (cash entry OMITTED at of omission following year
basis) year end
Unearned income Dr. Cash 100k Dr. Rent income Overstated Understated
Cr. Rent income (half at the end of ADJUSTMENT: ADJUSTMENT:
100k the year) LESS (-) ADD (+)
Cr. Unearned
Income (half of
the year end)
Accrued income No entry Dr. Interest Understated Overstated
Receivable ADJUSTMENT: ADJUSTMENT:
Cr. Interest ADD (+) LESS (-)
Income
Prepaid expense Dr. Insurance Dr. Prepaid Understated Overstated
Expense insurance ADJUSTMENT: ADJUSTMENT:
Cr. Cash Cr. Insurance ADD (+) LESS (-)
Expense
Accrued Expense No entry Dr. Utilities Overstated Understated
expense ADJUSTMENT: ADJUSTMENT:
Cr. Utilities LESS (-) ADD (+)
payable

GUIDE:
 Relation to Profit @ year of error
ASSET Direct (same effect)
Overstated asset Overstated Profit
ADJUSTMENT: LESS (-)
Understated asset Understated Profit
ADJUSTMENT:ADD (+)

LIABILITY Inverse(opposite effect)

Overstated Liability Understated Profit
ADJUSTMENT: ADD (+)
Understated Liability Overstated Profit
ADJUSTMENT : LESS (-)

PROBLEM 1:

Accruals & Deferrals Error- Counter Balancing

The Meow Company was organized on January 1,2020 and since its inception has not recognized
accruals and deferrals. Selected accounts revealed the ff. information.

Accruals and Deferrals 2020 2021 2022

Not recognized at Year
end

Prepaid expenses 29,000 30,000 34,000

Unearned Revenue 20,000 28,000 15,000
Accrued expenses 27,500 25,000 27,000
Accrued revenue 42,500 45,000 41,000

YEAR 2020 2021 2022

Profit (loss) 240,000 (120,000) 200,000

Based on the above and the result of your audit, compute the correct profit for the ff. year

1. In year 2020?
ANS: 264,000
2. In year 2021?
Ans: 122,000
3. In year 2022?
Ans: 211,000

Unadjusted net 240,000 (120,000) 200,000

income
Omission of prepaid 29,000 (29,000)
expense 30,000 (30,000)
34,000
Omission of Unearned (20,000) 20,000
revenue (28,000) 28,000
(15,000)
Omission of accrued (27,500) 27,500
expense (25,000) 25,000
(27,000)
Accrued of revenue 42,500 (42,500)
45,000 (45,000)
41,000
ADJUSTED PROFIT 264,000 122,000 211,000

Effect on profit of omission of accruals and deferrals DONE

Effect on profit of omission of trade A/R & advances from customer TACKLED
Effect on profit of omission of trade A/P
Effect on profit of erroneous inventory
Effect on profit of non counter balancing errors
Effect on working capital of error on current asset and current liability

“OMISSION OF TRADE A/R & ADVANCES FROM CUSTOMER”

Omission of Entry made when Entry made when Profit on the year Profit the
goods were cash is collected of omission following year
delivered at year the ff. year
of omission
Trade A/R No entry Dr. Cash Understated Overstated
Cr. Sales ADJUSTMENT: ADJUSTMENT:
ADD (+) LESS (-)
SHOULD BE:!!!! Dr. Trade /AR Dr. Cash
Cr. Sales Cr. Trade /AR

Omission of Entry made when Entry made when Profit on the year Profit the
cash is collected goods were of omission following year
in advance delivered the
following year
Advances from Dr. Cash No entry Overstated Understated
customer Cr. Sales ADJUSTMENT: ADJUSTMENT:
LESS (-) ADD (+)
SHOULD BE!!!! Dr. Cash Dr. Advances
Cr. Advances Customer
from customer Cr.Sales

Effect on profit of omission of accruals and deferrals DONE

Effect on profit of omission of trade A/R & advances from customer DONE
Effect on profit of omission of trade A/P TACKLED
 Effect on profit of erroneous inventory TACKLED
Effect on profit of non counter balancing errors
Effect on working capital of error on current asset and current liability

INVENTORY ERROR Profit year of error

Inventory beg, XX inverse

Add:purchases XX inverse Counter balance

Less:ending inventory XX direct Counter balance

CGS XX

Effect on profit of omission of accruals and deferrals DONE

Effect on profit of omission of trade A/R & advances from customer DONE
Effect on profit of omission of trade A/P DONE
Effect on profit of erroneous inventory DONE
Effect on profit of non counter balancing errors TACKLED
Effect on working capital of error on current asset and current liability

NON-COUNTER BALANCING ERROR

 Recording as outright expense of prepaid expense asset consumable 2 years or more

NET INCOME

YEAR OF ERROR

Year 1 Year 2 Year 3

Add back expense recorded XX MADE

Expense incurred (consumed) (XX) (XX) (XX) SHOULD BE

 Recording as income the unearned income that will be earned in 2 years or more

NET INCOME

YEAR OF ERROR
Year 1 Year 2 Year 3

Deduct income recorded (xx) MADE

Record income earned XX XX XX SHOULD BE

  Capital expenditure recorded as outright expense

NET INCOME

YEAR OF ERROR
Year 1 Year 2 Year 3

Add back expense recorded XX MADE

Deduct depreciation expense (xx) (xx) (xx) SHOULD BE

 Revenue expenditure erroneously capitalize

NET INCOME
YEAR OF ERROR
Year 1 Year 2 Year 3

Add back depreciation recorded xx xx xx MADE

Deduct outright expense (xx) SHOULD BE

PROBLEM 2

The December 31 year end financial statements of Wiz Khalifa Company contain the ff. errors:

December 31,2016 December 31,2017

Ending inventory 48,000 understated 40,500 overstated

Depreciation expense 11,500 understated

An insurance premium of 330,000 was prepaid in 2016 covering the years 2016,2017, and 2018.
The entire amount was charged to expense in 2016. In addition on December 31,2017 a fully
depreciated machinery was sold for 75,000 cash but the sale was not recorded until 2018. There were
no other errors during 2016 and 2017 and no corrections have been made for any of the errors. Ignore
income tax effects.

4. What is the total of the errors on Wiz Khalifa’s 2017 net income?
Ans: 123,500
5. What is the total effect of the errors on the amount of Wiz Khalifa working capital at
December 31,2017?
Ans: 144,500 UNDER
6. What is the total effect of the errors on the balance of Wiz Khalifa retained earnings at
December 31,2017?
Ans: 133,000

2016 2017 Cumulative

Ending inventory 2016 48,000 (48,000)
Ending inventory 2017 (40,500)
 Depreciation expense (11,500) 11,500
2016
Add back expense 330,000
recorded
Record true insurance (110,000) (110,000)
expense
Unrecorded gain on 75,000
sale
NET ERROR 256,500 (123,500) (133,000)

 Recording as outright expense of prepaid expense asset consumable 2 years or more

NET INCOME

YEAR OF ERROR

Year 1 Year 2 Year 3

Add back expense recorded 330,000 MADE

Expense incurred (consumed) (110,000) (110,000) (110,000) SHOULD BE

WORKING CAPITAL

WORKING CAPITAL
Current Asset Direct
Current Liability Inverse

WORKING CAPITAL
Overstatement of inventory 40,500 over
Understatement of prepaid expense 110,000 under
Understatement of cash 75,000 under
WORKING CAPITAL 144,500 UNDER

PROBLEM 3.

INOZENT ONE ,INC

STATEMENT OF FINANCIAL POSITION

DECEMBER 31,2022

ASSET LIABILITIES AND SHAREHOLDERS EQUITY

Cash 80K A/P 32K

A/R 160K N/P 64K

N/R 48K Capital stock 160k

Inventories 400K Retained eranings 432k

TOTAL 688K TOTAL 688K

Additional notes:

A. Further review and investigation of the company books revealed the ff. omissions and errors
which were not corrected during the year of errors:

2019 2020 2021 2022

Deferred expense 14,400 11,200 8,000 9,600
Deferred income 6,400 4,800
Accrued expense 3,200 1,200 1,600 800
Accrued income 2,000 2,400
END, INVENTORY-OVERSTATED 112,000 128,000
END, INVENTORY-UNDERSTATED 96,000 144,000

B. A 50,000 routinary repair cost incurred on its equipment at the beginning of 2019 was charged
to the equipment account and was depreciated using straight line method over the remaining
useful life of the equipment which was 5 years.
C. A 90,000 major repairs cost which enhanced the production capacity of one of its equipment
at the beginning of 2021 was charged to repaired expense, Remaining useful life of the related
production equipment was 3 years
Declared during the year 2019 to 2022 and no adjustment were made to retained earnings
The following net income:

YEAR 2019 2020 2021 2022

Net income 120,000 88,000 104,000 120,000

UNADJUSTED NET 120,000 88,000 104,000 120,000

INCOME
Omission of 14,400 (14,400) (11,200) (8,000)
prepaid expense 11,200 8,000 9,600
Omission of 6,400
prepaid income (6,400) (4,800)
Omission of (3,200) 3,200 1,200 1,600
accrued expense (1,200) (1,600) (800)
Omission of 2,000 (2,000)
accrued income 2,400
Ending inventory (112,000) 112,000 128,000
OV (128,000)
Ending inventory 96,000 (96,000) 144,000
US
Wrong (40,000) 10,000 10,000 10,000
 capitalization
Wrong 60,000
capitalization (30,000
ADJUSTED TO 187,200 (115,600) 158,800
PROFIT 372,000

 Revenue expenditure erroneously capitalize

NET INCOME
YEAR OF ERROR
Year 2019 2020 2021 2022

Add back depreciation recorded(50k/5yrs) 10,000 10,000 10,000 10,000

Deduct repair expense (50,000)

Adjustment to profit (40,000) 10,000 10,000 10,000

NET INCOME

YEAR OF ERROR
Year 2019 2020 2021 2022

Add back expense recorded 90,000

Deduct depreciation expense (90k/3yrs) (30,000) (30,000) (30,000) (30,000)

ADJUSTMENT PROFIT ( 30,000 ) (30,000) 60,000 (30,000)

MADE VS SHOULD BE ANALYSIS

MADE SHOULD BE ADJUST

Profit 2019 120,000 187,200

Profit 2020 88,000 (115,600)

Profit 2021 104,000 158,800

R/E 1/1/21 312,000 230,400 81,600 (a)

WORKING CAPITAL

WORKING CAPITAL
Understatement of prepaid asset 9,600 under
Understatement of unearned income 4,800 over
Understatement of accrued expense 800 over
Understatement of accrued income 2,400 under
Understatement of inventory 144,000 under
Understatement of inventory 150,400 under