Chapter 2 — Misstatements in the Financial Statements MULTIPLE CHOICE Items 1 and 2 are based on the following information: 1. Robi Corporation reported profit for the years 2016 and 2017 at P550,000 and P700,000, respectively. Your audit of the company’s accounts disclosed the need for adjustments as follows: 2016 2017 Overstatement of ending inventories due to error in pricing P 29,000 P 33,000 Omission of depreciation on newly- acquired equipment 15,000 15,000 Understatement of commission receivable 22,000 18,000 A purchase of merchandise was not recorded until the following year, and also was not included in the ending 60,000 inventory. The adjusted profit for 2017 was A. P677,000. B. P700,000. Cc. P710,000 D. P737,000 |. What is the effect of the foregoing errors on total assets at December 31, 2017? A. P30,000 overstated B. 36,000 overstated C. P45,000 overstated D. P66,000 overstated What is the effect of the foregoing errors on retained earnings at December 31, 2016? A. 22,000 overstated B. P38,000 understated C. 67,000 overstated D. P82,000 overstatedte sl tements . in the Financial Sta ia) Chapter 2 — Misstatements in the and prepayments during its first Year IS i I 4, Magic Company failed to recognize accrual ats and prepayments at the end of the of operations. The pre-tax earnings, accru year were: Peat ay 2 rofit . tome pet recognized at year-end were as follows: 200,000 Prepaid insurance 250,000 Accrued wages 300,000 Rent revenue collected in advance 100,000 Interest receivable ° The correct amount of pre-tax profit should be P4,750,000. 4,950,000. 5,000,000. P5,250,000. oo@> Bee Gees Company's statements for 2016 and 2017 included errors as follows: Year Ending Inventory Depreciation 2016 P200,000 understated P 50,000 understated 2017 P300,000 overstated P100,000 Overstated For how much should retained earnings be retroactively adjusted at January 1, 2018? - A. P250,000 increase, B. P250,000 decrease, C. P400,000 decrease, D. P200,000 decrease. Items 6 and 7 are based on the follo ing information: seeatles eae eet be or gations on January 1, 2016, Financial following errors: cember 31, 2016 and 2017, contained the a 2016 Ending inventory P16,000 unde 2017 se , inderstated ) “ove Depreciation expense 6, P15,000 ‘overstated Insurance expense ono. naerstated , rs 10,000 Prepaid insurance pversta 10,000 understated 10,000 UnderstategIn addition, on December 31, cash, but the sale was not 2016 or 2017 and no correc 1 2017, fully depreciated machiner ’ ry was sold for P10,800 poded until 2018. There were no other errors during ions have been made for any of the errors. 6. Ignoring income taxes, what is the total effect of the errors on 2017 profit? A. P30,200 overstated, B. P11,000 overstated. C. P 5,800 overstated. D. P 1,800 understated, 7. Ignoring income taxes, what is the total effect of the einers on the amot r ( a unt of working capital at December 31, 2017? P4,200 overstated. P5,800 understated. P6,000 understated. P9,800 understated. pom> 8. The Clarity, Inc. has determined its 2017 profit to be P5,000,000. In an initial audit of the company’s financial statements, you determined the following : * Revenue received in advance in 2017 of P250,000 was credited to a revenue account when received. Of the total, P50,000 was earned in 2017, P120,000 will be earned in 2018, and the remainder will be earned in 2019. No - adjustment was made at the end of 2017. * P150,000 unrealized loss on FVPL (financial assets at fair value through profit or loss) in 2017 was erroneously debited to other comprehensive income account. What is the corrected profit for the year 2017? P 4,600,000. : P4,650,000. P4,850,000. P4,930,000. Items 9 through 11 are based on the following information: re-tax income of P2,500,000 for the year ended nd verification of the transactions of the oop> 9, The Vitality Company showed p! a December 31, 2017. On your year- fi Company, you discovered the following errors: s of merchandise was purchased in 2017 and included in the coat However, the purchase was recorded only in 2018.te i ‘ ial Statem Chapter 2 - Misstatements in the Financial + Value added tax for the fourth quart + Rental of P300,000 on an equipment, ents 0 was properly Tecordeg ise. shi at P1,500,00 ; a > merchandise Sime rerchandse was inacversen es from the ae cain, since it has not arrived by Decem! 1 er of 2017, amounting to P500,000, Wag included in the Sales account. applicable for six months, was Teceiveg on November 1, 2017. The entire amount was reported as revenue Upon receipt. * Rent paid on building covering the period from July 1, 2017 to July 1, 2018, amounting to P1,200,000, was paid anid recorded as expense on July 1, 2017, The company did not make any adjustment at the end of the year. The corrected pre-tax profit for 2017 should be 10. 11. 12. No residual value. Because of a boo! in Erik’s 2016 financial statements, A. 2,400,000. B. 2,900,000. C. P3,000,000. D. 3,400,000. What is the net effect of the foregoing errors on the total assets at December 31, 20177 P600,000 understated P1,100,000 understated P1,500,000 understated P2,100,000 understated pom What is the total understatement of the total liabilities at December 31, 2017? A. P3,200,000 B. P1,700,000 C. P1,500,000 D. P1,200,000 On January 1, 2016, Erik Corporation acqui y cquired a machi 000. Tt was to be depreciated on the straight-line method ee 3 Teen eri wi kkeeping error, no depreciation was record preparation of Erik's 2017 financial statements ore 2s (lscovered during the machine in 2017 should be A B Cc. D. ments. Depreciation expense on P0.00 P40,000. P50,000 P80,00013. Upon inspection of the records of Compact Company, the following facts were discovered for the year ended December 31, 2017: + A fire insurance premium of P40,000 was paid and charged’ as insurance expense in 2017. The fire insurance policy covers ‘one year from April 1, 2017. «Inventory on January 1, 2017 was understated by P80,000. * Inventory on December 31, 2017 was understated by P120,000. * Expenses of P55,000 incurred during December were recorded when paid in January 2018. * On December 5, 2017, Compact credited to sales a cash advance of P100,000 received from a customer for goods delivered in January 2018. The company’s gross profit on sales is 40%. * The profit of Compact Company for the year ended December 31, 2017, before any adjustment for the above information, is P1,550,000. What is Compact Company’s corrected ‘profit for the year ended December 31, 2017? A. P1365,000 2 B. P1425,000. C. P1,445,000. D. P1505,000. 14. Leslie Inc. has correctly determined the. following information related to operations for 2017: Revenue from sales * P7,000,000 Expenses 4,000,000 Income before income taxes P3,000,000 In reviewing the records, ydu discovered the following items: * . During 2017, the company discovered an error in depreciation in 2016, The correction of this error,.which has not been recorded, will result in an increase in depreciation for 2016 of P200,000. * During 2017, the company sustained a loss of P400,000 because of flood, which destroyed its inventory. The company charged retained earnings and credited inventory for P400,000.How much is the correct profit before tax for the year 2017? P2,400,000. - P2,600,000. P3,000,000. P3,400,000. 9N@>P 15. Accrued salaries payable of P70,000 were not recorded at December 3 1, 201 Prepaid insurance of P30,000 at December 31, 2017 were erroneously treated : expense. Neither of these errors was discovered nor corrected. The effect of these two errors would cause ‘ A. 2017 Profit to be understated P100,000 and December 31, 2017 retained earnings to be understated P30,000. B. 2016 profit and December 31, 2016 retained earnings to be understated P70,000 each. C. 2016 profit to be overstated P40,000 and 2017 profit to be understated P30,000. D. 2017 profit and December 31, 2017 retained ‘earnings to be understated P30,000 each.