Accounting Review 2 Auditing

Correction of Errors

PROBLEM No. 1
Sakto Corporation asked you to review its records and prepare corrected financial statements. The books of accounts are
in agreement with the following statement of financial position:

Sakto Corporation
Statement of Financial Position
December 31, Year 4
Assets
Cash P 40,000
Accounts receivable 80,000
Notes receivable 24,000
Inventories 200,000
Total assets 344,000

Liabilities and Shareholders’ Equity

Accounts payable P 16,000
Notes payable 32,000
Share capital 80,000
Retained earnings 216,000
Liabilities and shareholders’ equity P344,000

A review of the company’s books indicates that the following errors and omissions had not been corrected during the
applicable years:

Year 1 Year 2 Year 3 Year 4

Ending inventory - overstated P - P56,000 P64,000 P -
Ending inventory - understated 48,000 - - 72,000
Prepaid expense 7,200 5,600 4,000 4,800
Unearned income - 3,200 - 2,400
Accrued expense 1,600 600 800 400
Accrued income - 1,000 - 1,200

No dividends were declared during the years Year 1 to Year 4 and no adjustments were made to retained earnings. The
company’s book reported the following net income:

Year 1 P60,000 Year 3 P52,000

Year 2 44,000 Year 4 60,000

Based on the above and the result of your audit, determine the adjusted amounts of the following: (Disregard tax
implications)

1. Net income in Year 1

2. Net income (loss) in Year 2
3. Net income (loss) in Year 3
4. Net income (loss) in Year 4
5. Retained earnings as of December 31, Year 4

PROBLEM No. 2
You were engaged by Brayshaw Company to audit its financial statements for the first time. In examining the books, you
found out that certain adjustments had been overlooked at the end of 2009 and 2010. You also discovered that other
items had been improperly recorded. These omissions and other failures for each year are summarized below:

12/31/10 12/31/09
Salaries payable 780,000 873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
Advances from customers (Collections from customers had been 561,000 470,400
recorded as sales but should have been recognized as advances from
customers because goods were not shipped until the following year)
Machinery (Capital expenditures had been recorded as repairs but should 522,000 564,000
have been charged to Machinery; the depreciation rate is 10% per year;
but depreciation in the year of expenditure is to be recognized at 5%)

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 Accounting Review 2 Auditing
Correction of Errors

Assuming that the nominal accounts for 2010 have not yet been closed into the income summary account.

Based on your audit, answer the following:

6. What is the net effect of the errors on the 2009 profit? Assume no corrections made.
7. What is the net effect of the errors on the 2010 profit? Assume no corrections made.
8. What is the net effect of the errors on the company’s working capital at December 31, 2010? Assume no corrections
made.
9. What is the net effect of the errors on the balance sheet of the company’s retained earnings at December 31, 2010?
Assume no corrections made.
10. What is the net adjustment on December 31, 2010 for retained earnings?

PROBLEM No. 3
You are auditing the financial statements of Bintana 7 for the year 2007. You made an examination of its records to
determine whatever adjustments and corrections are necessary. Prior to any adjustments, the details of the company’s
Accumulated Profit account are as follows:

Accumulated Profit
Date Particulars Debit Credit Balance
01/01/2005 Beginning Balance 870,000
12/31/2005 2005 Net income 465,000 1,335,000
01/31/2006 Dividends paid 210,000 1,125,000
04/01/2006 Paid in capital in excess of par 135,000 1,260,000
08/30/2006 Gain on retirement of preference 96,750 1,356,750
12/31/2006 2006 Net loss 307,500 1,049,250
01/31/2007 Dividends paid 150,000 899,250
12/31/2007 2007 Net loss 248,250 651,000

a. The following were omitted at the end of each year:

2007 2006 2005 2004

Accrued income 11,700 9,300 8,400 7,050
Unearned income 14,400 13,350 11,700 10,350
Accrued expenses 13,500 13,050 10,950 8,100
Prepayments 14,250 11,100 9,300 12,750

b. Dividends declarations were not recorded until paid the following year. Dividends declared in December 2007,
but paid and recorded only the following year amounted to P125,000.

c. The company received transportation equipment as donation from one of its stockholders on September 31,
2006. As of the date of donation, the equipment has a historical cost of P1,125,000; a remaining useful life of 3
years and a fair value of P360,000. The only entry made at the date of the donation was the entry expressing
P45,000, which is the fee paid to effect the transfer of ownership.

d. The company purchased a machine worth P405,000 on April 31, 2004. The company charged the purchase to
expense. The machine has a an estimated life of 3 year. The company uses the straight-line method.

e. The physical count of the merchandise inventory had been understated by P96,000 and by P66,750 at the end 0f
2005 and 2007, respectively.

f. The merchandise inventories at the end of 2006 and 2007 amounting to P651,000 and P48,900, respectively
were erroneously not included in the physical count and were likewise erroneously not recorded as purchases.

11. What is the correct accumulated profit as of December 31, 2004?

12. What is the correct net income for the year ended December 31, 2005
13. What is the correct accumulated profit balance as of December 31, 2006?
14. What is the correct net loss for the year ended December 31, 2007?

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 Accounting Review 2 Auditing
Correction of Errors

PROBLEM No. 4
You were able to gather the following in connection with your audit of the Ay-fone Distributors for the year ended
December 31, 2010:

1/1/2010 12/31/2010
Accounts receivable 6,400,000 4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising 14,250 40,000
Prepaid insurance 25,000 -
Unexpired insurance - 41,000

During the year:

Amount collected from customers 10,000,000

Total payments to suppliers of merchandise 13,618,000
Total payments to suppliers of merchandise of prior years 4,632,000
Wages paid 3,050,000
Advertising paid which includes P40,000 applicable in 2011 300,000
Insurance premium paid 125,000

Based on the above and the result of your audit, determine the following:
15. Net sales for 2010
16. Net purchases for 2010
17. Wages expense for 2010
18. Advertising expense for 2010
19. Insurance expense for 2010

PROBLEM No. 5
Presented below is information pertaining to Yunilab Specialty Foods, a calendar-year sole proprietorship, maintaining its
book on the cash basis during the year. At the end, however, Ms. Tere Sita Walanggalang’s accountant adjust the books
to the accrual basis only for sales, purchases, and cost of sales, and record depreciation to more clearly reflect the
business income for income tax purposes.

Yunilab Specialty Foods

Trial Balance
December 31, 2010
Debit Credit
Cash 185,000
Accounts receivable, 12/31/09 45,000
Inventory 200,000
Equipment 350,000
Accumulated depreciation, 13/31/09 90,000
Accounts payable, 12/31/09 48,000
Withholding tax payable 8,500
Walanggalang, drawing 240,000
Walanggalang, capital, 12/31/09 336,500
Sales 1,870,000
Purchases 827,000
Salaries 295,000
Taxes and licenses 29,000
Rent 84,000
Miscellaneous 39,000
Insurance 24,000
Utilities 35,000
2,353,000 2,353,000

During 2010, Yunilab signed a new eight-year lease for the store premises and is in the process of negotiating a loan for
remodeling purposes. The bank requires Yunilab to present financial statements for 2010 prepared on the accrual basis.
During the course of the engagement, Yunilab’s accountant obtained the following additional information:

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 Accounting Review 2 Auditing
Correction of Errors

1. Amounts due from customers totaled P79,000 at December 31, 2010.

2. A review of the receivable at December 31, 2010 disclosed that an allowance for doubtful accounts of P11,000
should be provided. Yunilab hand no bad debt losses from inception of the business through December 31,
2010.
3. The inventory amounted to P230,000 at December 31, 2010, based on a physical count of goods priced at cost.
No reduction to net realizable value was required.
4. On signing the new lease on October 1, 2010, Yunilab paid P84,000 representing one year’s rent in advance for
the lease year ending October 1, 2011. The P75,000 annual rental under the old lease was paid on October 1,
2009, for the lease year ended October 1, 2010.
5. On April 1, 2010, Yunilab paid P24,000 to renew the comprehensive insurance coverage for one year. The
premium was P21,600 on the old policy which expired on April 1, 2010.
6. Depreciation on equipment was computed at P58,000 for 2010.
7. Unpaid vendor’s invoices for food purchases totaled P88,000 at December 31, 2010.
8. Accrued expenses at December 31, 2009 and December 31, 2010 were as follows:
12/31/09 12/31/10
Salaries 3,750 5,100
Taxes and licenses 2,500 4,000
Utilities 2,750 4,500

Based on the above and the result of your engagement, you are asked to provide the following information under the
accrual basis:
20. Walanggalang, capital, 12/31/09
21. Profit for the year ended December 31, 2010
22. Walanggalang, capital, 12/31/10
23. Total assets at December 31, 2010
24. Total liabilities at December 31, 2010

PROBLEM No. 6
We were given the following information which were obtained from the following single-entry record of Y-Lee:
January 1 June 30
Interest receivable 12,000 9,600
Accounts receivable 540,000 1,056,000
Notes receivable 180,000 144,000
Merchandise inventory 456,000 120,000
Store and office equipment (net) 390,000 360,000
Prepaid operating expenses 30,000 26,400
Interest payable 3,600 6,000
Accounts payable 420,000 300,000
Notes payable 120,000 144,000
Accrued operating expenses 32,400 60,000

An analysis of the cashbook shows the following:

Balance, Jan. 1 180,000
Receipts:
Interest income 24,000
Accounts receivable 432,000
Notes receivable 180,000
Investment by Wiley 72,000 708,000
888,888
Disbursements:
Interest expense 18,000
Accounts payable 624,000
Notes payable 96,000
Operating expenses 204,000 942,000
Balance, June 30 - bank overdraft (54,000)

Determine the following for the six months ended June 30, 2010:
25. Sales
26. Purchases
27. Operating expenses, excluding depreciation
28. Net loss

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 Accounting Review 2 Auditing
Correction of Errors

PROBLEM No. 7
MYC Company began operations on January 1, 2009. The accounting records have been maintained on a double-entry
basis but the auditor noted that the company has used the cash basis of accounting. The trial balance prepared from
those records on December 31, 2010 is as follows:

Cash 750,000
Sales 2,000,000
Purchases 1,000,000
Operating expenses 750,000
Printing equipment 100,000
Ordinary shares 1,000,000
Land 400,000
Building 750,000
Mortgage payable 450,000
Retained earnings 300,000
3,750,000 3,750,000

During the course of the audit, the following data were gathered:

Accounts receivable at December 31, 2009 and December 31, 2010 were P100,000 and P250,000, respectively.
Accounts payable at December 31, 2009 and December 31, 2010 were P175,000 and P140,000, respectively.

Included in sales of 2010 was P20,000 paid in advance by a customer for goods to be delivered in 2011.

Accrued expenses total P35,000 at year-end 2009 and P50,000 at year-end 2010.

Merchandise inventory amounted to P75,000 at December 31, 2009 and P110,000 at December 31, 2010. The purchase
include P50,000 cash advance to a supplier for merchandise to be delivered in 2011.

The printing equipment was acquired on September 1, 2009. The estimated life is 10 years with no residual value. Land
and building were acquired on September 1, 2009 and the building has an estimated useful life of 20 years. (Use straight-
line method of depreciation.)

An analysis of the company’s receivables indicates that at December 31, 2010, 10% of outstanding accounts may prove
uncollectible.

The mortgage payable was related to the land and the building acquired on September 1, 2009. Interest is at 12% per
annum, payable semi-annually on September 1 and March 1. The mortgage liability is payable in annual installments of
P50,000 every August 31. The first installment was paid on August 31, 2010. The interest paid was charged to operating
expenses.

29. What is the profit for year ended December 31, 2010?
30. What is the total current assets as of December 31, 2010?
31. What is the total current liabilities?
32. What is the balance of adjusted retained earnings as of December 31, 2010?

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