ReSA Review School of Accountancy No. 735-9807 & 734-3989 AUDITINGPROBLEMS IRENEO/ESPENILLA ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY ERROR CORRECTION PROBLEM L:You were engogedtar the first tire to audit the financial statements of Yoda Corporation for the year endee December 31, 2017. The company started its operations in 2015. In reviewing the books, you viscovered that certain transactious/adisctments had either been overlooked or improperly recorded nt the end of the years 2025 to 2017, Ornissions/ailures and errors for each year are summarized below: [December 31 ~~] | 301s 1 sons of the foliowingyear-end accrdats/deterrals: I a Unearned rentat income - | 3,000 b. Accrued interest income [1,000 ©. Prepard insurance expense i 4. Acerved salanes 8,000 overstatement year-end sive stories - Uncerstarerent im year end inverrcs 12,000 | 4 Dewery of merchandise at year uw’ to”tustomels, recorded as sales pon coliection the following year 35,000 [5 eceitot merchandise at yearend, recorded a3 purchases upon | payment the following year © cash recewed from customers at yearend, Fecerded as soles, | | denvenesyet to be made the following yout 5S Payments to suppliers at year endfor ods fovlomng yearrecorded 9s purchases uan payment | Organization costs incurred the aarp of re Business at Degg of 2015 was capitalized as an ntynsibieosset nd Sccordingly amortized over pers of two vers 3° Moyer Tepairs on the company's equpraent were Fecognired os Sutnght experses, The company depreeiates oquiyment at 10% per Shum, but depreciation inthe yea of the expenditure i at 5% 18,000 | 23,000, 42,000 | 35.000. be received the” t t ‘The company's books also revesied the folowing information ; oo 2015 2016 2017 | ["Recumilated protts 2ss.a | 691,000 | 3,001,000 | Prof 4%, J00 | 586,000 460,600 | [Biwdeiiis deciared and distributes 110,000 | 130,000 150,000 } Required: Compute for the following ‘Adjusted profits for 2015 and 2017 ‘Adjusted accumulated profits valances at the end of 2026 and 2017 Net effects of the errors bn the 20:5, ard 2016 working capital [Net misstatement in total assets at the end of 2037 [Net misstatement in total linbiities at the end of 2026 wareigi stoternents uf Clerk Inc. for the year 2017-The details of the before any adjustments, are as follows, PROBLEM 2:You are auditing the company's Accumulated Profit acco nCCJMEAIED PROFIT Date | Particulars betnt Cred | Balance | 01.01. 2015 | Balance } 570,000 | 12.31. 2015 Net loss for the year 70,000 500,000 01.31 2016 | Owidends paid 716,000 290/000! | 94.20 2016 | Pard in Caprtal in excess 1 oat | 435,000 | 425,000. | 0831 2016 | Gain on reticement 91 preference ‘99,000 | $15,000 11234 2016; Net income for the year | 750,000. 1,265,000 | 01.31 2017 | Dividends pad 150,000 115,000 1231, 2017 Net loss for the yeo 248,250, 5 a6, 750ReSA: The Review School of Accountancy Page 2 of 5 Your examination disclosed the toflowing The following were omitted at ‘he er ot each year: 2013 2016 2015 2014 Accrued income 11,700 9,300 8,400 7,050 Prepayments i100 ___12)750. Total £1,700 20,400 P8400 _P19/800 Unearned income 14,400 44,700 Accrued expenses 14,250 13,059, 9,300___8,100 Total P28,650. 13,050 21,000 P8,100 Dividends had been seclared 1 2045 and in 2036 but were not recorded until paid the following year. Dividends declared in December 2117 tut paid and recorded only in 2018 amounted to P150,000. The company received tra ssportation equipment as donation from a stockholder on March 31, 2014. As of the date of donation, the equipment has a "emaining useful life of 3 years and a fair value of 240,000. The only entry made at the slate of the donation was expensing P15,000, which was the fee paid to effect the transfer of gvunership 4. Merchandise inventonescosting PS1,00 anid P48,000 were in transit from a supplier-at the end of 2015 and 2016, respectively. These were purchased under FOB shipping point and the goods were excluded from the physica! count made ‘at the end of each year, The purchases; however, were recorded the immediate following yea, up0" receipt of the complete purchase invoice documents. fe. Merchandise inventories with sales invoice prices of 70,000 and P140,000 were in transit to ‘customers at the end of 2015 ano .Ui7, reepectively. These goods, sold at 30% gross profit based on sales, sold under FOB Destination, were recorrle’ as sales in 2015 and 2017, respectively. Since goods have already been physically delivered as of the cout date, these goods were no longer included in the physical count of that particular year Requirements: Compute for the following: Accumulated profit as of December 31, 2013, 2025 and 2017 Profit(Loss) for the years ended Devember 312014 and 2016 Net adjustments to working capital, Decemper 31, 2016. Not adjustments to total liabil cemoer 31, 2015 Net adjustments to total assets, Cocernber 31, 2017, ACCOUNTING CHANGES PROBLEM 3: Lora Co. has been using the FIFO method of mventory casting since it Began operations in 2014. Net income reported for each year uindcr this costing method had been as follows Net income 2014 71,200,000 2015 985,900 2016 739,006 In 2016 the company decides to charige the raventory cost formulato the weighted average method. The following are the December 31 inventory balances under each method FIFO Weighted Average 2014 180,000 210,000 2015, 158,000 483,000 2016 195,000, 20,00 Requirements: Compute for the following, 1. Restated net income for 2015 45 a result ct #he change in policy 2) Adjusted profit for 2016 as a rosut of the change in policy, 3. Retroactive adjustment to the accumulated profits hegiarung balance of2016 as a result of this change PROBLEM 4: Bnght Company purchased the following equipment at the beginning of each year 201330,000 pordanae AUDITING PROBLEMS - BATCH 37ReSA: The Review School of Accountancy Page 3 of 5 JM-ine, over a S-year total useful hfe and with @ The company depreciates its equipment uncer st salvage value exjual to 10% of oviainal cost At the hequnin of 2015, the following changes were elected a. Sum-of years digits methea, 1b. Useful wes haveneen extended iy two yoars The salvage values have bren reduced to 4% of the asset's onginal cost. Depreciation expense for 2014 and 2013 2 2015 Depreciation expense, assuring the company changed its depreciation method to double~ decting iastead of SYD. CASH/ACCRUAL; SINGLE ENTRY PROBLEM 5. SMI Corp. accounts for W's sates under the cash pasts, Total collections from customers, sing cash sales made and recovencs of previously written-off accounts, based on SMB Corp.'s cash pts books amounted te P,400,000 xh nsvestigation revealed the following additional information: Accounts receivable, January 1, 2016 Accounts receivable, December 31, 2016 Notes recewable, trade, January 1, 2916. Notes recervable, trade, December 31, Sales discounts taken by custoineis Sales returns hefare collections were inade (Evidenced by sued eredi memos) rade, "hus refunds were given vable a reviouly write-olt - 16 Sales returne after collections Write off of worthiess accounts © Cash recovenes from account basis of accounting, s under the accru Requirements: Compute for the follow. Gross sales for the year Net sales for the year Uneollectible accounts expense for the year, ossurnng that the required allowance for uncollectible Tao at the begining and at the end of the year, respectively accounts were P21,009 ani P35 PROBLEM 6. The records of your audit ciest, SUV Corp, which maintains records under cash-basts, Feveated total payments made to suppiers of merchandise amounted to P1,250,000. Further investigation revealed the following additional information | accourts payabie, January 1, 70: s payable, December 31, 2016 Notes payable-trade, lanusty 3, 201 7 "Notes payable-trade, December 31, 7016 Merchandise inventories, December 31 2046 | Purcnase aiscounts purchase returns before 1 orwere received from the supy Purchase Feturns after payinerts were made, ths, cash was received | | trom supphers as refunds ve, thus credit memos iy payments were m, Requirements: Compute for the following under the accrual method. 1. Gross purchases for the yes 2. Cost of goods sold far the year PROBLEM?:An excerpt of ABC Corp.'s inceme statements prepared under cash basis included total operating expenses amounting to P7€5,000 and a total royalty income amounting to P9B0,000. Further ‘exarnination revealed the following information F nanuary 1, 2018, Dee, 31,2016 5 | Accrued operating expenses; 124,300 £178,000 Prepaid operating exp ses 56.090 90,000 ‘accrued royalty incor 44.000 25,000} Unearned royaity scorn fo2,008 76,000 AUDITING PROBLEMS - BATCH 37 : 100 * AcaReSA: The Review School cf Accountancy Page 4 of § Requirements: Compute for the followina under the accrual basis? 1. Operating expenses for the year 2 Royalty income for the year PROBLEM 8:BIC Corp, 1s in retailing schoo! supplies. The company kept very limited records and most of the company’s transactions are summarea yn cash records, BIC Corp. presented the following ‘information in line with your audit Total cash receipt (rom customers, based on cash records 765,000 Proceeds from a bank foan (note payable - non trade) 100,000 Total cash payments to suppliers, hased on cash records. 659,000 Total cash payments for ather operating expenses. 244,000 Credit memos issued, for sales returns and allowances 80,000 Total refunds for goods received as returns, based on cash records 45,000 Sales discount 60,000 Credit memos received for purchase returns 55,000 Total refunds for goods returned t» suppkers, based on cash records 25,000 Burchase discounts 50,000 Accounts wnitten off during the year 29,000 Recovery of previously written-off accounts 7,000 Increase in accounts receivable 135,000 Increase in accounts payable 129,000 Decrease in notes receivable 90,000 Decrease in notes payable for both trade end non-trade 40,000 Increase in merchandise inventory 61,000 Increase in prepaid operating expenses 39,000 Decrease in accrued operating expenses. 20,000 Required: Compute for the following under the accrual basis Gross sales for the year Net sales for the year Gross purchases for the year Cost of sales for the year Operating expenses for the year PROBLEM 9: The Revolutionary Corporation hegan operations in 2016. The company purchases ‘equipment from manufacturers and then sels them to retail stores. During 2036, the bookkeeper used a check register to record all cash receipts and cash aizbursements. No other journals were used, The following is a summary of the cash receipts and isbursements made during the year, Cash receipts: ‘Sale of share capital 50,000 Collections from customers 320,000 April 1, 2016, 12% loan borrowings to be paid on March 31, 2017 40,000 Total cash receipts ai0,000 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 The following additional information were gathered a Customers owed the company P22,000 at year end, P3,000 of which may probably not oe collected. There were no actual bad debts written-off in 2016. bb. At year end, P30,000 was still due to unpuiers of merchandise. At year-end, merchandise iiventory <0 sing P5C,000 stil remained on hand. 14.. Salanes owed to employees at year-end axnounted to P5,000, e. On December 1, 2016, P3,000rent was pzia representing rent for the months of December, 2916 until February, 2017 1 The equipment, wich has a 10-year tite, with no salvage value, was purchased on January 1, 2016. Straight-line depreciation 1s used WbITING PROBLEMS ° BATCH 37 --t00 &ReSA: The Review School of Accountancy Page 5 of 5 following Requirements” De o the aayustes bayance: of 8 c 2 L. Sales Revenu 10 339,000» -342,000 345,000 2. Cost of Sales ye) 220.000 250,000 270,000 3. Salaries expense ‘80,000 85,000 90,000 4. Rent Expense 12,000 «15,000 16,000 5. Net income 29,000 25,400 24,400 5. Total current assets 127,000 125,000 120,000 7. Total noncurrent assets 29,000 27,000 24,000 8, Total current abilities 70,000 78,000 78,600 > Total noncurrent habilives ° 3,600 40,000 «43,600 PROBLEM 10:Your audit of EduComipany revealed that your chent kept very limited records. Purchases of merchandise were paid through issuances of checks, but most payments were out of cash receipts. No Pacord mas kept forthe cash if bank arcourt, 90r was ¢ record kept for sales made. Accounts receivable there recorded only by Keeping copies of ticxets. Copies of these tickets were released to the customers Upon collection of their accounts, The fo¥avana infermation were obtained: The company started its operations on Yonuary 2, 2016. on which date 216,0000rdinary shareswath 2 bar value of P100 were issued in excnarie for the following: Cash 1,800,000 Building, usefil we 115 ears 16,200,000 ‘3,400,000 land owed total deposits of P12,600,000. Included in the total te of the share capital made on January 2, 2016. The bank was 900,000. 3, There were company's checks arnaunting to 2180,099, which were dated and issued in December: er 31, 2016 amounted to 2016, but paid by the bank in January 2017. Cash on hand on Gecemb 450/000, which Is inclusive of a deposit frort 3 customer io the amount of P335,000. 2. An analysis of the bank statement: deposits were cash proceeds from the statement balance on December 31, 20! 4. Dunng the year, the company borrowed P? .00,900 from the bank and repaid P400,000 in principal ‘3nd P80,000 in interest. The bank loan proveeds and the subsequent payments of both the principal ond anterest were automatically credited, debited, respectively, to the company’s cash account with the bank. 5. Disbursements made during the year, not Unrouah check issuances, but from cash collections, were eS tailows.. Utilities, P360,000, Salaries, 369,000; Supplies, P720,000, and; Dividends, PS40,000, There were neither accruals nor deferrals of expenses at the end of the year. 6. An inventory of mercnandise toien an December 31, 7046 showed P2,718,000 of merchandise. ho year totaled P3,240,000, OF this amount, P180,000may prove 7. Recounts receivable at the end ct uuncollectibie. 8. Unpaid supplier Invoices for merchandise purchased amounted to P3,260,000 at the end of the year. 2 o{ P1,440,09 was purchased on January 2, 2016, on an checks issued for the total installment price of the equipment eof 5 years and 1s being deprecated under the 9. Equipment with a cash purchose prt: installment basis. During the year, toto! totaled 1,602,000. The equipment has a useful # straight-line method rai pasis for the year 2016: Compute for the following under the a: 1. Gross Profit 2. Profit or Loss AUDITING PROBLEMS - BATCH 37ReSA The Review School of Accountancy Tei. No. 735-9807 & 734-3989 AUDITING PROBLEMS IRENEO/ESPENILLA QUIZZER 1 - PAS 8 AND CASH/ACCRUAL, SINGLE ENTRY PROBLEM 1: Bee Co's net income for 2012, 2013 and 2014 were P100,000, P145,000 and P185,000; respectively. The following items were not handed properly. a. Rent of P6,500for 2015 was received trom a lessee on December 23, 2014, and recorded as ‘outright income in 2014. c. The following [December 31,2012 jecember 31, 2013 3M, 2014 . On January 1, 2012, 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, 2012. As of December 31, 2014, the equipment had an onginal cost of P500,000 and a carrying value of 250,000. 1, The correct 2014 depreciation expense 1s: a. 31,250 $1,250 b. 50,000 4. 70,000 2. The corrected 2012 net income is: a. 80,000 240,000 b. 234,000 d. 309,000 3, The corrected 2013 net income is: 2. 113,700 126,700 b. 120,200 139,300 4, The corrected 2014 net income is: a. 184,700 165,600 b. 170,900 6. 164,700 5, The effect of the above errors on the 2614 veginning retzined earnings is: 2. 176,200 understatement 116,200 understatement b. 136,200 understaternent d. 3,800 overstaternent 6. The effect of the above errors on 2014 working capital 1s 2. 4,100 understatement €. 8,960 understatement b. 4,100 overstatement d. 8,900 overstatement PROBLEM 2: Log Corp..reported pretax incomes cf P4,545,000 and P3,483,000 for the years ended Gacember 31, 2013 and 2014, respectively. Your audit however revealed the following erro: a. Sales for 2013 included a P1,719,000 collection pertaining to a delivery made in Jenuary of 2014 under an FOB Shipping parnt freight tern. b. Inventory on December 31, 2013 was understated by P388,£00 while inventory on December 31, 2014 was overstated by P255,000. ce Interest expenses on Bands tor both years were recorded as payments were made every December 31. The bonds have a face value of 11,250,000 and pay a nominal interest rate