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Audprac 1 Problems

The document outlines various financial errors discovered in the Self-Sacrifice Company and Shannon Company over multiple years, affecting net income and retained earnings. It details specific errors such as unrecorded accrued expenses, misclassified insurance premiums, and overstated inventories, requiring adjustments for accurate financial reporting. Additionally, it includes exercises for calculating the net effect of these errors on net income and working capital for the years 2020 and 2021.

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ROANNE MAE GALAMAY
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2 views

Audprac 1 Problems

The document outlines various financial errors discovered in the Self-Sacrifice Company and Shannon Company over multiple years, affecting net income and retained earnings. It details specific errors such as unrecorded accrued expenses, misclassified insurance premiums, and overstated inventories, requiring adjustments for accurate financial reporting. Additionally, it includes exercises for calculating the net effect of these errors on net income and working capital for the years 2020 and 2021.

Uploaded by

ROANNE MAE GALAMAY
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ILLUSTRATION 1: COMBINED AND COUNTERBALANCING ERRORS

Self-sacrifice Company reported net income for a two-year period as follows:

2020 – 120,000 2021 – 180,000

In an audit of the financial statement for the year ended December 31, 2020. The following errors are
discovered:

1. The company paid one-year insurance premium of P18,000 effective May 1, 2020. The entire amount was
debited to expense account and no adjustment was made at the end of 2020.
2. The company leased a portion of its building for P24,000. The term of the lease is one year ending June
1, 2021. Collection of rent was credited to rent revenue account. At the end of 2020, no entry was made
to take up the unearned portion of the amount collected.
3. Accrued salaries expense of P12,000 was not recorded at the end of 2020.
4. Accrued interest receivable of P15,000 was not recorded at the end of 2020.

Required:

1. Compute for the adjusted net income in 2020 and 2021 and Retained earnings as of the years ended
December 31, 2020 and 2021.
2. Give the effect of the error in the 2020 working capital.
3. Prepare adjusting entries assuming errors were discovered in (a) 2020, (b) 2021, and 2022.

ILLUSTRATION 2: COMBINED AND COUNTERBALANCING ERRORS

Self-Sacrifice Company reported net income for a two-year period as follows:

2020 – 120,000 2021 – 180,000

In an audit of the statement for the year ended December 31, 2020, the following errors are discovered:

1. Advances to supplier in 2020 were recorded as purchases but the merchandise was received in the
following year, P20,000.
2. Advances from customers in 2020 recorded as sales in 2020 but the goods were delivered in the
following year, P50,000.
3. On December 31, 2020, the ending inventory was overstated by P25,000.

REQUIRED:

1. Compute for the adjusted net income in 2020 and 2021 and Retained Earnings as of the years ended
December 31, 2020 and 2021.
2. Give the effect of the error in the 2020 working capital.
3. Prepare adjusting entries assuming errors were discovered in 2020, 2021 and 2022.

EXERCISES:

Shannon Company began operations on January 1, 2020. The financial statements contained the following
errors:

2020 2021
Ending inventory 160,000 understated 150,000 overstated
Depreciation expense 60,000 understated
Insurance expense 100,000 overstated 100,000 understated
Prepaid insurance 100,000 understated

On December 31, 2021, fully depreciated machinery was sold for P110,000 cash but the sale was not recorded
until 2022. No corrections have been made for any of the errors.

Ignoring income tax, what amount should be reported as net effect of the errors on:

1. Net Income for 2020


2. Net Income for 2021
3. Retained earnings on December 31, 2021
4. Working capital on December 31, 2021
ILLUSTRATION: COMBINED AND NONCOUNTER-BALANCING ERRORS

Self-sacrifice Company reported net income for a two-year period as follows:

2020 – 6,000,000 2021- 8,000,000

In an audit of the statement for the year ended December 31, 2020, the following errors are discovered:

1. The company paid one-year insurance premium of P240,000 effective April 1, 2020. The entire
amount was debited to asset account and no adjustment was made at the end of 2020.
2. The company leased a portion of its building for P480,000. The term of the lease is one year ending April
30, 2021. Collection of rent was credited to unearned rent revenue account. At the end of 2020, no entry
was made to take up the earned portion of the amount collected.
3. Depreciation expense in 2020 was understated by P12,000
4. Depreciation expense in 2021 was overstated by P14,000.
5. Bad debts expense of P11,000 was not recorded in 2020.

Required:

1. Adjusted Net Income in 2020 and 2021 and Adjusted Retained Earnings
2. Give the effect of the error in 2020 working capital.
3. Prepare AJEs.

EXERCISES: ERROR CORRECTION


For three years Chona’s Merchandise failed to recognize accruals, prepayments and other transactions
to its accounts. Reported net income and a listing of the errors appear below:
2020 2021 2022
Reported Net Income/(Loss) 1,200,000 400,000 (100,000)
a. Failed to record accrued expenses 20,000 25,000 48,000

b. Failed to record accrued salaries 13,000 18,000 0

c. Understated depreciation 12,000 15,000 15,000


expenses
d. Overstated ending inventories 36,000 28,000 0
e. Failed to record purchase on 0 0 40,000
account; merchandise properly
included in ending inventory

f. Failed to recognize unused 3,000 0 4,000


supplies at the end of the
accounting period
g. Failed to recognize gain on sale of 60,000 0 0
land; Land credited for amount of
proceeds
h. Failed to recognize unearned 0 5,000 9,000
revenue at end of accounting
period.

Required: Prepare a schedule to correct the reported net income for each year. Prepare the correcting
entry.

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