AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E.

FERNANDEZ

ERROR CORRECTIONS, ACCOUNTING CHANGES, CASH/ACCRUAL and SINGLE

ENTRY
ERROR CORRECTION
PROBLEM 1: You were engaged for the first time to audit the financial statement of Satoru
Corporation for the period ended December 31, 2021. The company started its operation in 2019. In
reviewing the books, the auditor discovered that adjustments had either been overlooked or improperly
recorded at the end of the years 2019 to 2021. Omissions and other failures for each year are summarized
below:
December 31
Observations
2019 2020 2021
1. Omissions of the following year-end accruals and deferrals:
a. Accrued utilities expense 5,000 7,000 6,000
b. Accrued interest income 2,000 4,000 3,000
c. Prepaid rent expense 2,000 1,000
d. Unearned royalty income 8,000 3,000
2. Delivery of merchandise at year-end to customers,
5,000 10,000
recorded as sales upon collection the following year
3. Receipt of merchandise at year-end from suppliers,
6,000 3,000
recorded as purchases upon payment the following year
4. Cash received from customers at year-end recorded as
sales, deliveries yet to be made until the following year. In the
3,000 5,000
year of collection, corresponding inventories at cost were
included in the physical count.
5. Payments to suppliers at year-end for goods to be received
the following year, under FOB destination, recorded as
2,000 1,000
purchases upon payment. Inventories were included in the
physical count at the year when these were received.
6. Overstatement in year-end inventories 9,000 7,000
7. Understatement in year-end inventories 4,000
8. Organization costs incurred in the start-up of the business
at the beginning of 2019 was capitalized by the company as an 50,000
intangible asset and has been amortized for 5 years.
9. Major repairs on the company's equipment were
recognized as outright expenses. The company depreciates
35,000 40,000
equipment at 20% per annum, but the depreciation in the
year of the expenditure is at 10%.

The company’s books also revealed the following information:

2019 2020 2021
Retained Earnings 235,000 691,000 1,001,000
Net Income 345,000 586,000 460,000
Dividends declared and distributed 110,000 130,000 150,000

Required:
1. Adjusted net income for 2019, 2020 and 2021.
2. Adjusting Entries for the year 2021.
3. Adjusted retained earnings balances at the end of 2019, 2020 and 2021.
4. Net effects of the errors on the 2019, 2020 and 2021 working capital.

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AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E. FERNANDEZ

PROBLEM 2: You are auditing the financial statements of Light Inc. for the year 2021. The details
of the company’s Retained Earnings account, before any adjustments, are as follows:
Retained Earnings
Date Particulars Debit Credit Balance
1/1/19 Balance 870,000
12/31/19 Net income for the year 465,000 1,335,000
1/31/20 Dividends paid 210,000 1,125,000
4/30/20 Paid in Capital in excess of par 135,000 1,260,000
8/31/20 Gain on retirement of preference 96,750 1,356,750
12/31/20 Net loss for the year 307,500 1,049,250
1/31/21 Dividends paid 150,000 899,250
12/31/21 Net loss for the year 248,250 651,000

Your examination disclosed the following:

a. The following are omitted at the end of the year:
2021 2020 2019 2018
Accrued income 11,700 9,300 8,400 7,050
Prepayments 11,100 - 12,750
Total 11,700 20,400 8,400 19,800

Unearned income 14,400 11,700

Accrued expenses 14,250 13,050 9,300 8,100
Total 28,650 13,050 21,000 8,100

b. Dividends had been declared in 2019 and in 2020 but were not recorded until paid the following
year. Dividends declared in December 31, 2021, but paid and recorded only in 2022 amounted to
P 125,000.

c. The company received transportation equipment as donation from stockholders on September

30, 2020. As of the date of donation, the equipment has a remaining useful life of 3 years and a
fair value of P 360,000. The only entry made at the date of the donation was expensing P
45,000, which was the fee paid to effect the transfer of ownership.

d. Merchandise inventory costing P 51,000 and P 48,000 were in transit from a supplier at the end
of 2020 and 2021, respectively. These were purchased under FOB shipping point and the goods
were excluded from the physical count made at the end of each year. The purchases; however,
were recorded the immediately following year, upon receipt of the complete purchase invoice
documents.

e. Merchandise inventories with sales invoice prices of P 90,000 and P 120,000 were in transit to
customers at the end of 2019 and 2021, respectively. These goods, sold at 40% gross profit based
on sales, sold under FOB Destination, were recorded as sales in 2019 and 2021, respectively.
Since goods have already been physically delivered as of the count date, these goods were no
longer included in the physical count at the end of each year.

Requirements: Compute for the adjusted balances of the following:

5. Adjusted retained earnings balances at the end of 2018, 2020 and 2021.
6. Adjusted net income for the year ended December 31, 2019, and 2021.

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AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E. FERNANDEZ

ACCOUNTING CHANGES
PROBLEM 3: Echizen Co. has been using the FIFO method of inventory costing since it began
operations in 2019. Net income reported for each year under this costing method had been as follows:
Net income

2019 900,000
2020 845,000
2021 929,000

In 2021, the company decided to change the inventory cost formula to the weighted average method.
The following are the December 31 inventory balances under each method:
FIFO Weighted Average

2019 150,000 165,000

2020 145,000 156,000
2021 195,000 209,000

Requirements: Compute for the following:

7. Restated net income for 2020 as a result of the change in policy.
8. Adjusted net income for 2021 as a result of the change in policy.
9. Retroactive adjustment to the Retained earnings beginning balance of 2021 as a result of this
change.

PROBLEM 4: Luffy Company purchased the following equipment at the beginning of each year:
2018 – P 50,000
2019 - 40,000
The company depreciates its equipment under straight-line, over a 5-year total useful life and with a
salvage value equal to 10% of original cost. At the beginning of 2020, the following changes were effected:
a) Sum-of-years digits method
b) Useful life has been extended by two years
c) The salvage value has been reduced to 4% of the asset’s original cost.
Requirements: Compute for the following:
1. Depreciation expense for 2019 and 2020
2. 2020 Depreciation expense, assuming the company changed its depreciation method to
double-declining; instead of SYD, depreciation method.

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AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E. FERNANDEZ

PROBLEM 5: Hanma Corporation accounts for its sales under the cash basis. Total collections from
customers, including cash sales made and recoveries of previously written-off accounts, based on Hanma
Corp’s cash receipts books amounted to P 1,400,000. Audit investigation revealed the following
additional information:

Accounts receivable, January 1, 2021 100,000

Accounts receivable, December 31, 2021 140,000
Notes receivable, trade outstanding, January 1, 2021 80,000
Notes receivable, trade outstanding, December 31, 2021 90,000
Sales discount taken by customers 40,000
Sales returns before collections were made (Evidenced by issued credit memos) 25,000
Sales returns after collections were made, thus refunds were given 5,000
Write-off worthless accounts receivable 30,000
Cash recoveries from accounts previously write-off 10,000

Requirements: Compute for the following under the accrual basis of accounting:
10. Gross sales for the year
11. Net sales for the year
12. Uncollectible accounts were P 21,000 and P 35,000 at the beginning and at the end of the year,
respectively

PROBLEM 6: The records of your audit client, Slayer Corp., which maintains records under cash-basis,
revealed total payments made to supplier of merchandise amounted to P 1,250,000. Further
investigation revealed the following additional information:

Accounts payable, January 1, 2021 75,000

Accounts payable, December 31, 2021 108,000
Notes payable-trade, January 1, 2021 57,000
Notes payable-trade, December 31, 2021 42,000
Merchandise inventories, January 1, 2021 189,000
Merchandise inventories, December 31, 2021 243,000
Purchase discounts 45,000
Purchase returns before any payments were made, thus credit memos were received
55,000
from the suppliers
Purchase returns after payments were made, thus, cash was received from suppliers
25,000
as refunds

Requirements: Compute for the following under the accrual method:

1. Gross purchases for the year
2. Cost of goods sold for the year

CASH/ACCRUAL ACCOUNTING; SINGLE ENTRY

PROBLEM 7: An excerpt of Akatsuki Corporation’s income statements prepared under cash basis
included total operating expenses amounting to P 765,000.00 and a total royalty income amounting to
P 980,000.00. Further examination revealed the following information:
Accounts January 01, 2021 December 01, 2021
Accrued operating expenses P 124,000.00 P 178,000.00
Prepaid operating expenses 56,000.00 90,000.00
Accrued royalty Income 44,000.00 25,000.00
Unearned royalty income 102,000.00 76,000.00

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AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E. FERNANDEZ

Requirements: Compute for the following under the accrual basis.

1. Operating expenses for the year
2. Royalty income for the year

PROBLEM 8: Straw Hat Corp. is in retailing school supplies. The company kept very limited records
and most of the company’s transactions are summarized in cash records. Straw Hat Corp presented the
following information, in line with your audit:
Total cash receipt from customers, based on cash records P 765,000.00
Proceeds from a bank loan (notes payable - non-trade) 100,000.00
Total cash payments to suppliers, based on cash records 659,000.00
Total cash payments for other operating expenses 244,000.00
Credit memos issued, for sales returns and allowances 80,000.00
Total refunds for goods received as returns, based on cash records 45,000.00
Sales discount 60,000.00
Credit memos received for purchase returns 55,000.00
Total refunds for goods returned to suppliers, based on cash records 25,000.00
Purchase discounts 50,000.00
Accounts written off during the year 29,000.00
Recovery of previously written-off accounts 7,000.00
Increase in accounts receivable 135,000.00
Increase in accounts payable 129,000.00
Decrease in notes receivable 90,000.00
Decrease in notes payable for both trade and non-trade 40,000.00
Increase in merchandise inventory 61,000.00
Increase in prepaid operating expenses 39,000.00
Decrease in accrued operating expenses 20,000.00

Required: Compute for the following under the accrual basis:

1. Gross sales for the year
2. Net sales for the year
3. Gross purchases for the year
4. Cost of sales for the year
5. Operating expenses for the year

PROBLEM 9: The Revolutionary Corporation began operations in 2021. The company purchases
equipment from manufacturers and then sells them to retail stores. During 2021, the bookkeeper used a
check register to record all cash receipts and disbursements. No other journals were used. The following
is a summary of the cash receipts and disbursements made during the year:
Cash receipts:
Sale of share capital ₱50,000
Collections from customers 320,000
April 1, 2021, 12% loan borrowings
40,000
to be paid on March 31, 2022
Total cash receipts 410,000

Cash disbursements:
Purchase of merchandise 220,000
Payment of salaries 80,000
Acquisition of equipment 30,000
Payment of rent 14,000
Miscellaneous expenses 10,000
Total cash disbursements 354,000

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AUDITING AND ASSURANCE: CONCEPTS AND APPLICATIONS 1 E. FERNANDEZ

The following additional information were gathered:

a) Customers owed the company P 22,000 at year end. Of this amount, P 3,000 may
probably not be collected. There were no actual bad debts written-off in 2021.
b) At year end, P 30,000 was still due to suppliers of merchandise.
c) At year end, merchandise inventory costing P 50,000 still remained on hand.
d) Salaries owed to employees at year end amounted to P 5,000.
e) On December 31, 2021, P 3,000 rent was paid representing rent for the months of
December 2021 until February 2017.
f) The equipment, which has a 10-year life, with no salvage value, was purchased on
January 1, 2021. Straight-line depreciation is used.

Requirements: Determine the adjusted balances of the following:

A B C D
1. Sales 320,000 339,000 342,000 345,000
2. Cost of Sales 200,000 220,000 250,000 270,000
3. Salaries Expense 75,000 80,000 85,000 90,000
4. Rent Expense 9,000 12,000 15,000 16,000
5. Net Income 32,000 29,000 25,400 24,400
6. Total Current Assets 130,000 127,000 125,000 120,000
7. Total Noncurrent Assets 30,000 28,000 27,000 24,000
8. Total Current Liabilities 38,600 70,000 75,000 78,600
9. Total Noncurrent Liabilities - 3,600 40,000 43,600

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