AUDITING PROBLEMS

Correction of Errors, Cash & Accrual, Single & Double Entry

and Accounting Changes Dr. Glen De Leon, CPA

ERRORS
No company whether large or small is immune from errors. Errors may be intentional or unintentional. Intentional
errors are significant because of the presence of fraud or intent to deceive. These errors are made for the purpose of
concealing fraud or misappropriation, evading taxes, manipulating or window-dressing the company's financial statements.
Unintentional errors were not deliberately committed. They result from carelessness or ignorance on the part of the company's
personnel or it may result from poor internal control.
The risk of material errors may be minimized through the installation of good internal control and the application of
sound accounting procedures. Prior period adjustments, also called fundamental errors are reported in the current year as
adjustment in the beginning balance of the Retained Earnings account. Prior period statements should be restated to correct
the error when comparative statements are prepared.

Accounting Procedure:
1. If detected in the period the error occurred, correct the accounts through normal accounting cycle
adjustments.
2. If detected in subsequent period, adjust errors by making prior period adjustments directly to Retained
Earnings or restate the beginning balance of the Retained Earnings account.
3. Correct all previously presented prior period statements.

Examples of Accounting errors:

a. A change from an accounting principle that is not generally accepted to an accounting principle that is generally
accepted.
b. Mathematical mistakes
c. Mistake in the application of accounting principle
d. Oversight
e. Misuse of facts
f. Incorrect classification of expense as an asset or vice versa
g. Changes in estimates which are not prepared in good faith

TYPES OF ERRORS
1. Balance Sheet Errors
This type of error refers to improper classification of real accounts such as assets, liabilities or stockholders' equity
accounts. They have no effect on net income
2. Income Statement Errors
This type of error affects only the presentation of nominal accounts in the Income Statement. It involves the
improper classification of revenues and expenses accounts, hence, only the details of the Income Statement are misstated. A
reclassifying entry is necessary only if the error is discovered in the same year it is committed. It has no effect on the Balance
sheet and in the Income Statement. If the error is discovered in a subsequent year, no classification entry is necessary.
3. Combined Balance Sheet and Income Statement errors
This affects both the balance Sheet and the Income Statement because they result in the misstatement of net
income.

Classifications of Combined Balance Sheet and Income Statement Errors:

a. Counter Balancing Errors
 Errors which if not detected are automatically offset or corrected over two periods. Restatement is
necessary even if a correcting journal entry is not required.
 Effect: Net Income of two successive periods are misstated. The amount of misstatement in one period is
equal to but opposite in effect in the income of the next period.
 Counterbalancing errors include the misstatements of the following accounts:
1. Inventories to include the following
a. Purchases
b. Sales
2. Prepaid expenses
3. Deferred Income
4. Accrued expense
5. Accrued Income

GUIDELINES
 Books are open
1. If the error is already counterbalanced and the company is in the second year, an entry is
necessary to correct the current period and to adjust the beginning balance of the Retained
earnings.
2. If the error is not yet counterbalanced, an entry is necessary to adjust the beginning balance of
the Retained earnings and correct the current period.
 Books are closed
1. If the error is already counterbalanced, no entry is necessary.
2. If the error is not yet counterbalanced, an entry is necessary to adjust the present balance of the
Retained earnings.

b. Non Counter Balancing Errors

AUDITING PROBLEMS HO - 1 1
  Errors which take longer than two periods to correct themselves. This type of error is carried over to the
subsequent accounting period until corrected or until the balance sheet item involved is removed from the
accounts by sales, retirement or other means of disposal.

GUIDELINES IN ERROR ANALYSIS

1. What accounts are affected?
2. How were these accounts affected? Was there an understatement or an overstatement?
3. What was the erroneous entry made or what was the entry omitted?
4. What is the correct entry?
5. What is the necessary adjusting or correcting entry?

ACCOUNTING CHANGES

Definition of Terms
 Accounting policies - specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing
and presenting the financial statements.
 Fundamental errors - are errors discovered in the current period with such significance, that the financial statements
of one or more prior periods can no longer be considered to have been reliable at the date of their issue.

Reasons why Accounting Changes Occur:

1. The accounting profession may mandate that a new accounting principle is to be used.
2. Changing economic conditions
3. Changes in technology and in operations
4. New experience or new information may prompt companies to change its estimate of revenues or expenses.

TYPES OF ACCOUNTING CHANGES

1. Change in Accounting Principles
This is a change from one generally accepted accounting principle to another generally accepted accounting principle.
Adoption of a new principle in recognition of events that have occurred for the 1st time is not a change in accounting principle.
There is no change in accounting principle when the depreciation method adopted for a newly acquired asset is different from
the method or methods used for previously recorded assets of similar class.
A change from a principle that is not generally accepted to one that is generally accepted is considered to be an error
correction than a change in accounting principle.

Accounting Procedure:
Benchmark treatment
A change in accounting policy/principle should be applied retroactively unless the amount of any resulting adjustment
that relates to prior periods is not reasonably determinable. Any resulting adjustment should be reported as an adjustment to
the opening balance of the retained earnings. Comparative information should be restated unless it is impracticable to do so.

2. Change in Accounting Estimate

This is a change that occur as a result of new information or acquisition of additional experience. Changes in
estimates are viewed as normal recurring corrections and adjustments or the natural result of the accounting process.
Retroactive treatment is prohibited.

Accounting Procedure:
a. Report current and future financial statements on the new basis.
b. Present prior period financial statements as previously reported.
c. Make no adjustment to current period opening balances.

NOTE: Whenever it is impossible to determine whether a change in principle or a change in estimate has occurred, or if an
asset is affected by both a change in principle and a change in estimate during the same period, the change should be
accounted for as a change in estimate rather than a change in principle.

PROBLEM 1: CORRECTION OF ERRORS: The following selected accounts are included in the trial balance of ARAL NA MUNA
AKO Company. on December 31, 2017:

Debit Credit
Supplies on hand P162,000
Accrued salaries payable P90,000
Interest receivable 306,000
Prepaid insurance 5,400,000
Unearned rent
Accrued interest payable 900,000

Additional information is as follows:

1. A physical count of supplies on hand on December 31, 2017 totaled P66,000.

2. The accountant failed to adjust the accrued salaries payable account. Accrued
salaries payable on December 31, 2017, totaled P264,000.
3. The interest receivable account was also left unadjusted at December 31, 2017.
Accrued interest receivable on December 31, 2017, amounted to P261,000.
4. The unexpired portions of the insurance policies totaled P3,900,000 as of December 31, 2017.
5. A total of P1,680,000 was received on January 1, 2017, for the rent of a building for both 2017 and 2018.
The total amount received was recognized as revenue in 2017.
6. The correct amount of depreciation for the year was P3,000,000 but was erroneously recorded as P300,000.

AUDITING PROBLEMS HO - 1 2
 7. Prior years’ depreciation was understated by P432,000.

Prepare the necessary adjusting journal entries on December 31, 2017. Assume that the books have not been closed.

PROBLEM 2: CORRECTION OF ERRORS: TAMA NA MUNA ANG PARTY PARTY COMPANY’s December 31, year-end financial
statement contained the following errors:

December 31, 2016 December 31, 2017

Ending inventory P120,000 understated P108,000 overstated
Depreciation expense 24,000 understated -

An insurance premium of P90, 000 was prepaid in 2016 covering the years 2016, 2017 and 2018. The same was charged to
expense in full in 2016. In addition, on December 31, 2017, fully depreciated machinery was sold for P192, 000 cash, but the
sale was not recorded until 2018. There were no other errors during 2016, 2017, and 2018 and no corrections have been made
for any of the errors. Ignore income tax considerations.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. What is the total effect of the errors on the 2016 net income?
a. understated by 84,000 c. overstated by 201,500
b. understated by 156,000 d. no effect

2. What is the total effect of the errors on the 2017 net income?
a. overstated by 36,000 c. overstated by 66,000
b. overstated by 258,000 d. understated by 54,000

3. What is the total effect of the errors on the company’s working capital at December 31, 2017?
a. understated by 108,000 c. overstated by 84,000
c. understated by 114,000 d. no effect

4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2017?
a. understated by 60,000 c. overstated by 132,000
b. understated by 90,000 d. no effect

5. What is the total effect of the errors on the company’s working capital at December 31, 2018?
a. overstated by 78,000 c. understated by 192,000
b. understated by 114,000 d. no effect

PROBLEM 3: CORRECTION OF ERRORS: You were engaged by SIMULA NG PAGDURUSA 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 2016 and 2017. You also discovered that other items had been improperly recorded. These omissions and other failures for
each year are summarized below:

12/31/2017 12/31/2016
Salaries payable P936,000 P1,048,320
Interest receivable 255,600 311,040
Prepaid insurance 369,360 460,800
Advances from customers (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) 673,200 564,480
Machinery (Capital expenditures had been
recorded as repairs but should 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%) 626,400 676,800

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. What is the total effect of the errors on the 2016 net income?
a. understated by 96,480 c. understated by 906,960
b. overstated by 1,483,920 d. overstated by 198,000

2. What is the total effect of the errors on the 2017 net income?
a. understated by 384,120 c. understated by 389,160
b. overstated by 456,840 d. overstated by 451,800

3. What is the total effect of the errors on the company’s working capital at December 31, 2017?
a. understated by 318,960 c. understated by 143,280
b. overstated by 984,240 d. overstated by 362,160

AUDITING PROBLEMS HO - 1 3
 4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2017?
a. understated by 1,027,080 c. understated by 1,117,080
b. overstated by 318,960 d. understated by 186,120

PROBLEM 4: CORRECTION OF ERRORS: SANA MAKAYANAN KO engaged you in 2017 to examine its books and records and to
make whatever adjustments are necessary.

Your examination disclosed the following:

A. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS

DATE PARTICULARS DEBIT CREDIT BALANCE

2015
Jan.1 Balance P696,000
Dec.31 Net income for the year P372,000 1,068,000
2016
Jan.31 Dividends paid P168,000 900,000
Apr.3 Paid in capital in excess
Of par 108,000 1,008,000
Aug.30 Gain on retirement of
Preferred stock at less
Than issue price 77,400 1,085,400
Dec.31 Net loss for the year 246,000 839,400
2017
Jan.31 Dividends paid 120,000 719,400
Dec.31 Net loss for the year 198,600 520,800

B. The company failed to properly recognize accruals and prepayments. Selected accounts revealed the following
information:

2014 2015 2016 2017

1. Prepaid expenses P10,200 P7,440 P8,880 P11,400
2. Accrued expenses 6,480 8,760 10,440 10,800
3. Unearned income 8,280 9,360 10,680 11,520
4. Accrued income 5,640 6,720 7,440 9,360

C. Dividends had been declared on December 31 in 2015 and 2016 but had not been entered in the books until paid.

D. The company purchased a machine worth P324,000 on April 30, 2014. The
company charged the purchase to expense. The machine has an estimated
useful life of 3 years. The company uses the straight-line method and residual
values are deemed immaterial.

D. The company received a transportation equipment as donation from one of its

Shareholders on September 30, 2016. The equipment was used to deliver goods
to customers. The equipment costs P900,000 and has a remaining life of 3 years
on the date of donation. The equipment has a fair value of P288,000 and
P36,000 was incurred for registering the transfer of ownership. The company did
not record the donation on its books. The expenses paid related to the donated
equipment were charged to expense.

F. The physical inventory of merchandise had been understated by P76,800 and by

P53,400 at the end of 2015 and 2016 respectively.

G. The merchandise inventories at the end of 2016 and 2017 did not include
merchandise that was then in transit shipped FOB shipping point. These
shipments of P52,080 and P39,120 were recorded as purchases in January
2017 and 2018, respectively.

QUESTIONS:

Based on the above audit findings, the adjusted balances of the following are:
(Disregard tax implications)

1. Retained earnings December 31, 2014

a. 913,080 c. 697,080
b. 949,080 d. 1,021,080

2. Net income for 2015

a. 335,760 c. 443,760
b. 447,720 d. 258,960

3. Retained earnings December 31, 2015

a. 1,032,840 c. 1,172,040
b. 864,840 d. 1,116,840

AUDITING PROBLEMS HO - 1 4
 4. Net loss for 2016
a. 323,640 c. 419,640
b. 455,640 d. 431,640

5. Retained earnings December 31, 2016

a. 289,200 c. 493,200
b. 577,200 d. 409,200

6. Net loss for 2017

a. 273,960 c. 141,960
b. 213,960 d. 177,960
7. Retained earnings December 31, 2017
a. 435,240 c. 399,240
b. 303,240 d. 363,240

PROBLEM 5: CORRECTION OF ERRORS: ANG HIRAP NG SUBJECT NA’TO’s current assets and liabilities section of the balance
sheet as of December 31, 2017 appear as follows:

Current assets
Cash P1,440,000
Accounts receivable P3,204,000
Less Allowance for doubtful accounts 252,000 2,952,000
Inventories 6,156,000
Prepaid expenses 324,000
Total current assets P10,872,000

Current Liabilities
Accounts payable P2,196,000
Notes payable 2,412,000
Total current liabilities P4,608,000

The following errors in the corporation’s accounting have been discovered:

a. January 2017 cash disbursements entered as of December 2017 included payment of accounts payable in the
amount of P1,404,000, on which a cash discount of 2% was taken.
b. The inventory included P972,000 of merchandise that have been received at December 31 but for which no
purchase invoices have been received or entered. Of this amount P432,000 had been received on consignment;
the remainder was purchased f.o.b. destination, terms 2/10, n/30.
c. Sales for the first four days in January 2018 in the amount of P1,080,000 were entered in the sales book as of
December 31, 2017. Of these, P774,000 were sales on account and the remainder were cash sales.
d. Cash, not including cash sales, collected in January 2017 and entered as of December 31, 2017, totaled
P1,271,664. Of this amount P839,664 was received on account after cash discounts of 2% had been deducted;
the remainder represented the proceeds of a bank loan.

Questions:

Based on the above and the result of your audit, determine the following:

1. Adjusted cash balance as of December 31, 2017

a. 770,256 c. 1,266,336
b. 1,238,256 d. 1,544,256

2. Adjusted accounts receivable balance as of December 31, 2017

a. 3,754,800 c. 3,286,800
b. 3,034,800 d. 3,269,664

3. Adjusted accounts payable balance as of December 31, 2017

a. 4,140,000 c. 2,628,000
b. 3,600,000 d. 3,571,920

4. Adjusted working capital as of December 31, 2017

a. 4,201,056 c. 4,229,136
b. 4,993,056 d. 4,741,056

5. Net misstatement in the reported net income for the year ended December 31, 2017 as a result of the errors
a. 1,522,944 c. 2,041,056
b. 2,062,944 d. 1,501,056

PROBLEM 6: CASH TO ACCRUAL: SIGURADO DUGO UTAK KO Enterprises records all transactions on the cash basis. The
company’s accountant prepared the following income statement at the end of the company’s first year of operations:

SIGURADO DUGO UTAK KO Enterprises

Income Statement
For the year ended December 31, 2017

Sales P 2,419,200
Selling and administrative expenses:

AUDITING PROBLEMS HO - 1 5
 Salaries expense P 748,800
Rent expense 432,000
Utilities expense 278,400
Equipment 288,000
Commission expense 362,880
Insurance expense 57,600
Interest expense 28,800 2,196,480
Net income P 222,720

You have been asked to prepare an income statement on the accrual basis. The following information is given to you to assist in
the preparation:

(a) Amounts due from customers at year-end were P268,800. Of this amount, P28,800 will probably not be collected.
(b) Salaries of P105,600 for December 2017 were paid on January 5, 2018.
(c) SIGURADO DUGO UTAK KO rents its building for P28,800 a month, payable quarterly in advance.
The contract was signed on January 1, 2017.
(d) The bill for December’s utility costs of P25,920 was paid January 10, 2018.
(e) Equipment of P288, 000 was purchased on January 1, 2017. The expected life is 5 years, no salvage value. Assume
straight line depreciation.
(f) Commissions of 15% of sales are paid on the same day cash is received from customers.
(g) A 1-year insurance policy was issued in company assets on July 1, 2017. Premiums are paid annually in advance.
(h) SIGURADO DUGO UTAK KO borrowed P480,000 for one year on May 1, 2017. Interest payments based on an annual
rate of 12% are made quarterly, beginning with the first payment on August 1, 2017.

QUESTION:

How much is the net income before income tax under the accrual basis of accounting?
a. P616,800 c. P631,200
b. P343,200 d. P388,800

PROBLEM 7: CASH TO ACCRUAL: You were able to gather the following in connection with your audit of the KAYA WALA
MUNANG SOCIAL MEDIA Company for the year ended December 31, 2017:

01/01/2017 12/31/2017
Accounts receivable P7,680,000 P4,800,000
Unpaid merchandise invoices ? 3,145,200
Accrued wages 102,000 150,000
Advertising supplies inventory 42,000 90,000
Accrued advertising 17,100 48,000
Prepaid insurance 30,000 -
Unexpired insurance - 49,200

During the year:

Amount collected from customers P12,000,000
Total payments to suppliers of merchandise 16,341,600
Total payments to suppliers of merchandise of prior years’ 5,558,400
Wages paid 3,660,000
Advertising paid which includes P48,000 applicable in 2016 360,000
Insurance premium paid 150,000

Questions:

Based on the above and the result of your audit, determine the following:

1. Net sales for 2017

a. 9,120,000 c. 7,680,000
b. 14,880,000 d. 16,800,000

2. Net purchases for 2017

a. 18,754,800 c. 19,486,800
b. 16,341,600 d. 13,928,400

3. Wages expense for 2017

a. 3,660,000 c. 3,708,000
b. 3,720,000 d. 3,612,000

4. Advertising expense for 2017

a. 312,000 c. 342,900
b. 294,900 d. 360,000

5. Insurance expense for 2017

a. 130,800 c. 169,200
b. 120,000 d. 100,800

PROBLEM 8: CASH TO ACCRUAL: The income statement of KUNG HINDI KO ITITIGIL Corporation for 2017 included the
following items:

AUDITING PROBLEMS HO - 1 6
 Interest income P2, 521,200
Salaries expense 1,980,000
Insurance expense 332,640

The following balances have been excerpted from KUNG HINDI KO ITITIGIL Corporation’s balance sheets:

1/1/2017 12/31/2017
Accrued interest receivable P198,000 P240,240
Accrued salaries payable 110,880 234,960
Insurance expense 39,600 29,040

Questions:

Based on the above and the result of your audit, determine the following:

1. The cash received for interest during 2017 was

a. P2,563,440 c. P2,521,200
b. P2,478,960 d. P2,280,960
2. The cash paid for salaries during 2017 was
a. P2,214,960 c. P1,869,120
b. P1,855,920 d. P2,104,080

3. The cash paid for insurance premiums during 2017 was

a. P322,080 c. P343,200
c. P293,040 d. P303,600

PROBLEM 9: CASH TO ACCRUAL: SIGURADO UULIT AKO Company paid or collected during 2017 the following items:

Insurance premiums paid P 554,400

Interest collected 1,112,400
Salaries paid 4,867,200

The following balances have been excerpted from SIGURADO UULIT AKO Company’s balance sheets:

1/1/2017 12/31/2017
Prepaid insurance P 54,000 P 43,200
Interest receivable 104,400 133,200
Salaries payable 381,600 442,800

Questions:

Based on the above and the result of your audit, determine the following:

1. The insurance expense on the income statement for 2017 was

a. 565200 c. 651,600
b. 543,600 d. 457,200

2. The interest income on the income statement for 2017 was

a. 729,000 c. 1,141,200
b. 1,083,600 d. 874,800

3. The salary expense on the income statement for 2017 was

a. 4,806,000 c. 1,620,000
b. 5,691,600 d. 4,928,400

PROBLEM 10: SINGLE ENTRY: We were given the following information which were obtained from the single-entry records of
HINDI NAGBIBIRO SI DOC G Company :

January 1 June 30

Interest receivable P 14,400 P 11,520

Accounts receivable 648,000 1,267,200
Notes receivable 216,000 172,800
Merchandise inventory 547,200 144,000
Store and office equipment (net) 468,000 432,000
Prepaid operating expenses 36,000 31,680
Interest payable 4,320 7,200
Accounts payable 504,000 360,000
Notes payable 144,000 172,800
Accrued operating expenses 38,880 72,000

An analysis of the cashbook shows the following:

Balance, January 1 P216,000

Receipts:
Interest income P 28,800
Accounts receivable 518,400
Notes receivable 216,000

AUDITING PROBLEMS HO - 1 7
 Investment by HINDI NAGBIBIRO SI DOC G 86,400 849,600
P1,065,600
Disbursements:
Interest expense P 21,600
Accounts payable 748,800
Notes payable 115,200
Operating expenses 244,800 1,130,400
Balance, June 30-bank overdraft (P64,800)

QUESTIONS:

Based on the above and the result of your audit, determine the following for the six months ended June 30,2015:

1. Sales
a. P1,310,400 c. P158,400
b. P1,137,600 d. P1,396,800

2. Purchases
a. P691,200 c. P979,200
b. P604,800 d. P748,800

2. Operating expenses, excluding depreciation

a. P273,600 c. P282,240
b. P207,360 d. P277,920

3. Net loss
a. P 5,760 c. P 182,880
c. P158,400 d. P1,465,920

PROBLEM 11: ACCOUNTING CHANGES: On January 4, 2015, KAYA NGAYON NA ANG SIMULA, Inc. purchased computer
hardware for P720,000. On the date of acquisition, KAYA NGAYON NA ANG SIMULA management estimated that the computers
would have an estimated useful life of 5 years and would have a residual value of P72,000. The company used the double-
declining-balance method to depreciate the computer hardware.

In January 2017, KAYA NGAYON NA ANG SIMULA management realized that technological advancements had made the
computers virtually obsolete and that they would have to be replaced. Management decided to change the estimated useful
life of the computer hardware to 2 years.

How much depreciation on computer hardware should be recorded in 2017?

a. 144,000 c. 300,000
b. 120,000 d. 360,000

PROBLEM 12: ACCOUNTING CHANGES: NG AMING PAGBABAGO Company decided on January 2, 2017, to review the
accounting practices. This is due to changing economic conditions and to make its financial statements more comparable to
those of other companies in its industry.
The following changes will be effective as of January 1, 2017:

 NG AMING PAGBABAGO decided to change its allowance for bad debts from 2% to 4% of its outstanding
receivables balance. CARDO’s receivable balance at December 31, 2017, was P828,000. Allowance for bad debts
had a debit balance of P2,400 before the adjustment.
 NG AMING PAGBABAGO decided to use the straight-line method of depreciation on its equipment instead of
the sum-of-the-years-digits method. It was also decided that this asset has 10 more years of useful life as of
January 2, 2017 the equipment was purchased on January 1, 2007, at a cost of P1,320,000. On the acquisition
date, it was estimated that the equipment would have a 15-year useful life with no residual value.

1. The entry to record the current year provision for bad debts is
a. Bad debt expense 30,720
Allowance for bad debts 30,720

b. Allowance for bad debts 30,720

Bad debt expense 30,720

c. Bad debt expense 35,520

Allowance for bad debts 35,520

d. Allowance for bad debts 35,520

Bad debt expense 35,520

2. What is the amount of depreciation on equipment for the current year?

a. 38,500 c. 11,000
b. 16,500 d. 55,000

PROBLEM 13: ACCOUNTING CHANGES: In the past, PARA MAKARATING NA Company has depreciated its computer hardware
using the straight-line method. The computer hardware has a 10% salvage value and an estimated useful life of 5 years. As a
result of the rapid advancement in information technology, management of PARA MAKARATING NA has determined that it
receives most of the benefits from its computer facilities in the first few years of ownership. Hence, as of January 1, 2017,
Wacky proposes changing to the sum-of-the-years-digits method for depreciating its computer hardware. The following
computer purchases were made by PARA MAKARATING NA at the beginning of each year.

AUDITING PROBLEMS HO - 1 8
 2014 P108,000
2015 60,000
2016 72,000

1. How much depreciation expense was recorded by PARA MAKARATING NA Company in 2014, 2015, and 2016?
2014 2015 2016
b. 21,600 33,600 48,000
c. 43,200 43,200 43,200
d. 19,440 43,200 43,200
e. 19,440 30,240 43,200

2. The amount of depreciation expense that should be recognized in 2017 is

a. 75,936 c. 41,040
b. 62,856 d. 25,488

3. What journal entry, if any, should be prepared on January 1, 2017, to adjust the accounts?
a. Retained earnings 32,400
Accumulated depreciation 32,400

b. Accumulated depreciation 32,400

Retained earnings 32,400

c. Depreciation expense 32,400

Accumulated depreciation 32,400

d. No entry is necessary

PROBLEM 14: ACCOUNTING CHANGES: On January 1, 2017, management of SA MINIMITHING TAGUMPAY Company decided
to make a revision in the estimates associated with its production equipment. The equipment was acquired on January 3, 2015,
for P960,000 and had been depreciated using straight-line method. At the date of acquisition, it had an estimated useful life of
10 years with an estimated salvage value of P60,000. Management has determined that the equipment’s remaining useful life is
4 years and that it has an estimated residual value of P72,000.

1. What is the amount of depreciation expense recognized in 2015 and 2016?

a. 150,000 c. 96,000
b. 88,800 d. 90,000

2. What is the amount of depreciation expense that should be recognized in 2017 as a result of the changes in
estimates?
a. 180,000 c. 90,000
b. 177,000 d. 150,000

PROBLEM 15: On January 1, 2014, SO HELP ME GOD! Inc. purchased an equipment for P780,000. The machine had an
estimated useful life of 8 years (with no residual life) at the acquisition date. On January 1, 2017, ONYOK determined, as a result
of additional information, that the equipment had an estimated useful life of 10 years from the acquisition date with no
residual value.

1. Prepare the journal entry, if any, to record the cumulative effect of the change on prior years.
2. What is the amount of depreciation expense on the equipment for the year ended December 31, 2017?
a. 48,750 c. 111,420
b. 69,643 d. 78,000

“IF YOU GET OFF TO A BAD START, DON’T WORRY

IT’S THE FINISH NOT THE START THAT COUNTS”

AUDITING PROBLEMS HO - 1 9