CMPC 313 ERROR CORRECTION -1-

MULTIPLE CHOICE COMPUTATIONAL:

PROBLEM 1:

ABC Co.’s net income for 2020, 2021 and 2022 were P100,000, P145,000 and P185,000; respectively. The
following items were not handled properly.

a. Rent of P6,500 for 2023 was received from a lessee on December 23, 2022, and recorded as outright income
in 2022.

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

December 31, 2019 2,500

December 31, 2020 5,500
December 31, 2021 7,500
December 31, 2022 4,700

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

December 31, 2019 3,500

December 31, 2020 6,500
December 31, 2021 3,700
December 31, 2022 7,100

d. On January 1, 2020, 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, 2020.
As of December 31, 2022, the equipment had an original cost of P500,000 and a carrying value of P250,000.

1. The correct 2022 depreciation expense is:

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

2. The corrected 2020 net income is:

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

3. The corrected 2021 net income is:

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

4. The corrected 2022 net income is:

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

5. The effect of the above errors on the 2022 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 2022 working capital is:

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

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PROBLEM 2:

ABC Corp.. reported pretax incomes of P4,545,000 and P3,483,000 for the years ended December 31, 2021
and 2022, respectively. Your audit however revealed the following errors:

a. Sales for 2021 included a P1,719,000 collection pertaining to a delivery made in January of 2022 under
an FOB Shipping point freight term.

b. Inventory on December 31, 2021 was understated by P388,800 while inventory on December 31, 2022
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, 2020 to yield an effective interest rate of 7%.

d. Ordinary repairs to equipment had been charged to the Equipment account during 2021 to 2022.
Repairs of P382,500 and P423,000 had been incurred in 2021 and 2022, 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:

1. What is the adjusted pretax income for 2021?

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

2. What is the adjusted pretax income for 2022?

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

PROBLEM 3:

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

a. Equipment XYZ was acquired on January 2019 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, 2022, 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, 2020. 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, 2022, 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, 2019, 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, 2022, 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?
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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

PROBLEM 4:

In the course of your examination of the December 31, 2022, financial statements of Insular Corp, you
discovered certain errors that had occurred during 2021 and 2022. No errors were corrected during 2021. The
errors are summarized below:

a. Beginning merchandise inventory (January 1, 2021) was understated by P259,200.

b. Merchandise costing P72,000 was sold for P120,000 to Naval Company on December 28, 2021, but the
sale was recorded in 2022. The merchandise was shipped FOB shipping point and was not included
in ending inventory. Insular uses the periodic inventory system.

c. A two-year fire insurance policy was purchased on May 1, 2021, for P172,800. The whole amount was
charged to Prepaid Insurance. No adjusting entry was prepared in 2021 and 2022.

d. A one-year note receivable of P288,000 was held by Insular beginning October 1, 2021. Payment of the
10% note and accrued interest was received upon maturity. No adjusting entry was made on December
31, 2021.

e. Equipment with a 10 year useful life was purchased on January 1, 2021, for P1,176,000. No
depreciation expense was recorded during 2021 or 2022. 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 2021 and a P1,750,000 net income in 2022.

Requirements:

1. What is the net adjustment to the beginning retained earnings account in 2022?
a. 69,600 b. 175,200 c. 127,200. d. 48,000

2. What is the adjusted balance of the net income in 2022?

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

PROBLEM 5:

You were engaged by ABC 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 2021 and 2022. Moreover,
you also discovered that other items had been erroneously recorded. The said omissions and other failures
for each year are noted below:

2021 2022
Prepaid insurance 256,000 205,200
Accrued salaries and wages 582,400 520,000
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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 2022 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, 2022?
a. Understated by 202,200 c. Understated by 177,200
b. Overstated by 79,600 d. Overstated by 546,800

3. If remained unadjusted, what will be the effect of the errors to the company’s December 31, 2022
accumulated profits?
a. Understated by 103,400 c. Understated by 177,200
b. Overstated by 620,600 d. Overstated by 570,600

PROBLEM 6:

The income statements of ABC Inc. indicate the following net income:
2020 P1,500,000
2021 1,750,000
2022 2,000,000

An examination of the accounting records for the year ended December 31, 2022 indicates that several errors
were made. The following errors were discovered:

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

2019 P95,000
2020 110,000
2021 100,000
2022 140,000

b. The footings and extensions showed that the inventory on December 31, 2021 was overstated by
P190,000.

c. P150,000 worth of inventories were received on January 4, 2023. Upon investigation you discovered
that these goods were shipped by the supplier on December 30, 2022 FOB Shipping point. Further
investigation revealed that liability on the item were recorded when the goods were received.

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

2019 P75,000
2020 100,000
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2021 115,000
2022 120,000

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

2020 P20,000
2021 25,000
2022 30,000

f. On January 1, 2022 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.

g. You also discovered that on July 1, 2020, 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, 2020 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, 2022.

Required:

1. What is the correct depreciation expense in 2022?

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

2. What is the correct net income in 2020?

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

3. What is the correct net income in 2021?

a. 1,540,000 c. 1,640,000
b. 1,590,000 d. 1,690,000

4. What is the correct net income in 2022?

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

PROBLEM 7
The December 31 year-end financial statements of PEANUT Company contained the following errors:
Dec. 31, 2020 Dec. 31, 2021
Ending inventory P100,000 understated P90,000overstated
Depreciation expense P20,000 understated
An insurance premium of P75,000 was prepaid in 2020 covering years 2020, 2021 and 2022. The entire amount
was charged to expense in 2020. In addition, on December 31, 2021, a fully depreciated machinery was sold
for P160,000 cash, but the sale was not recorded until 2022. There were no other errors during 2020,2021 and
2022, and no corrections have been made for any of the errors. Ignore Income tax consideration

1. What is the total effect of the errors on PEANUT’s 2020 net income?
A. Understated by P130,000 C. Overstated by P70,000
B. Understated by P155,000 D. no effect
2. What is the total effect of the errors on the 2021 profit?
A. 50,000 overstatement C. 215,000 overstatement
B. 30,000 overstatement D. 45,000 understatement
3. What is the total effect of the errors on the balance of PEANUT’s retained earnings at December 31,
2021?
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A. 95,000 understatement C. 90,000 overstatement
B. 70,000 overstatement D. No effect

PROBLEM 8
CRISPY Corporation has been using the accrual basis of accounting. However, an examination of the records
reveals that some expenses and revenues have been handled on a cash basis by the inexperienced bookkeeper
of the company. Income statements prepared by the bookkeeper reported P145,000 net income for 2021 and
P185,000 net income for 2022. Further review of the records reveals that the following items were handled
improperly.
• Rent of P6,500 was received from a lessee on December 23, 2021. It was recorded as income at that time
even though the rental pertains to 2022.
• Salaries payable on December 31 have been consistently omitted from the records of that date and have
been recorded as expenses when paid in the following year. The salary accruals recorded in this manner
were P5,500 for December 31, 2020; P7,500 for December 31, 2021; and P4,700 for December 31, 2022.
• Invoices for office supplies purchased have been charged to expense accounts when received. Inventories
of supplies on hand at the end of each year have been ignored, and no entry has been made for them.
Supplies on hand were P6,500 on December 31, 2020; P3,700 on December 31, 2021; and P7,100 on
December 31, 2022.

1. What is the corrected net income for 2021?

A. 133,700 B. 144,200 C. 146,700 D. 139,300
2. What is the corrected net income for 2022?
A. 184,700 B. 197,700 C. 185,600 D. 190,900

-END OF HANDOUTS-

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