ACCOUNTING CHANGES & ERROR CORRECTION

DISCUSSION EXERCISES

STRAIGHT PROBLEMS
ACCOUNTING CHANGES
1. The following transactions affected the accounts of NEVERMORE INC. for the year ended December 31, 2018.
The transactions are summarized per account as follows:
 BAD DEBTS: In computing its doubtful accounts expense, NEVERMORE use percentage of accounts
receivable method. On January 1, 2018, NEVERMORE decided to change the percentage from 3% to 8% of
accounts receivable. As of December 31, 2018, the receivable account has a balance of P150,000. As of
January 1, 2018, the allowance for doubtful accounts has a balance of P6,000 and during the year
recoveries of previously written-off account amounted to P3,000 and write-off amounted to P1,000.

 DEPRECIATION: As of January 1, 2018, NEVERMORE decided to change its depreciation method for its
office equipment from straight line to sum-of-the-years-digit (SYD) method. All office equipment has a
10% salvage value with an estimated useful life of 6 years. Office equipment purchases at the beginning
of each year are as follows:
2015 P100,000
2016 P120,000
2017 P150,000

 INVENTORIES: From the past years, NEVERMORE uses FIFO Method of inventory costing but in 2018, it
changed its inventory cost flow to Weighted Average Method. Inventory balances at the end of each year
under each method are as follows:
FIFO WEIGHTED AVERAGE
2016 P600,000 P750,000
2017 550,000 680,000
2018 700,000 900,000
In all the transactions above, the company is subject to 30% income tax rate.
REQUIREMENTS:
(1) What is the carrying value of the accounts receivable as of December 31, 2018?
(2) What is the amount of doubtful accounts expense for the year ended December 31, 2018?
(3) What is the depreciation expense for 2018?
(4) What is the carrying amount of office equipment to be presented in the statement of financial position as
of December 31, 2018?
(5) What is the effect on the beginning balance of retained earnings of 2018 with regards to the change in
inventory method?

ERROR CORRECTION
2. MIRANA CO.’s net income for 2012, 2013 and 2014 were P100,000, P145,000 and P185,000; respectively. The
following items were not handled properly. The retained earnings in 2012 has a beginning balance of P50,000
a) Rent of P6,500 for 2015 was received from a lessee on December 23, 2014 and recorded as outright
income in 2014.

b) Salaries payable at the end of the following years are omitted:

December 31, 2011 P2,500
December 31, 2012 5,500
December 31, 2013 7,500
December 31, 2014 4,700

c) The following unused office supplies were omitted in the accounting records:
December 31, 2011 3,500
December 31, 2012 6,500
December 31, 2013 3,700
December 31, 2014 7,100

d) 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 original cost of P500,000 and a carrying value of
P250,000.
REQUIREMENTS:
1) What is the correct net income for 2012, 2013 and 2014?
2) What is the correct depreciation expense for 2014?
3) What is the adjusted retained earnings balance at the end of 2012, 2013 and 2014?
4) What is the net adjustments on the beginning balance of retained earnings in 2012, 2013 and 2014?
5) What is the effect of the above errors on 2012, 2013 and 2014 working capital?

3. KGA Co., who started in 2018, made the following errors:

a) December 31, 2018 inventory was understated by P25,000.
b) December 31, 2019 inventory was overstated by P40,000.
c) Purchases on account in 2018 were understated by P100,000 (not included in physical count).
d) Advances to suppliers in 2019 totaling P130,000 were inappropriately charged as purchases.
e) December 31, 2018 prepaid insurance was overstated by P5,000.
f) December 31, 2018 unearned rent income was overstated by P26,000.
g) December 31, 2019 interest receivable was understated by P17,000.
h) December 31, 2019 accrued salaries payable was understated by P30,000.
i) Advances from customers in 2019 totaling P60,000 were inappropriately recognized as sales but the
goods were delivered in 2020.
j) Depreciation expense in 2018 was overstated by P7,200.
k) In 2019, the acquisition cost of a delivery truck amounting to P90,000 was inappropriately charged as
expense. The delivery truck has a useful life of five years. KGA’s policy is to provide a full year’s straight-
line depreciation in the year of acquisition and none in the year of disposal.
l) A fully depreciated equipment with no residual value was sold in 2020 for P50,000 but the sale was
 recorded in the following year.
Profits before correction of errors were P123,000, P156,000 and P210,000 in 2018, 2019 and 2020, respectively.
REQUIREMENTS:
1) What is the correct net income for 2018, 2019 and 2020?
2) What is the adjusted retained earnings balance at the end of 2018, 2019 and 2020?
3) What is the effect of the above errors on 2018, 2019 and 2020 working capital?

PROBLEMS
Use the following information in answering the next item (s):
On January 1, 2018, KARDEL CORP. purchased a machinery costing P200,000 with a 10% residual value. The
estimated useful life of the item of PPE is 10 years and to be depreciated using straight line method. During
January 2020, the management realized that technological advancements had an impact on the machinery they
bought, so they made changes in estimates.

1. If management decided to change the depreciation method to sum-of the years’ digit with a change in total
useful life of 5 years, what is depreciation expense for the year 2020?
A. 82,000 C. 72,000
B. 73,800 D. 64,800

2. If management decided to change the depreciation method to double declining balance method, the machine
having a remaining useful life of 2 years, what is depreciation expense for the year 2020?
A. 164,000 C. 72,000
B. 82,000 D. 144,000

3. On January 1, 2014, NEVERMORE CORP. decided to decrease the estimated useful life of an existing patent from
10 years to 8 years. The patent was purchased on January 1, 2009 for P3,000,000. The estimated residual value
is zero. The entity decided on January 1, 2014 to change the depreciation method from an accelerated method
to the straight line method. On January 1, 2014, the cost of a depreciable asset is P8,000,000 and the
accumulated depreciation is P3,400,000. The remaining useful life of the depreciable asset on January 1, 2014 is
10 years and the residual value is P200,000. What is the total charge against income for 2014 as a result of the
accounting changes?
A. 627,500 C. 940,000
B. 647,500 D. 960,000

4. During 2018, TRAXEX CORP. decided to change its inventory cost flow method from Average to FIFO Method.
Inventory balances under each method were as follows:
AVERAGE FIFO
January 1 P2,500,000 P2,200,000
December 31 P2,900,000 P2,400,000
If the income tax rate is 30%, what amount should be reported in the statement of retained earnings for 2018 as
the cumulative effect of the change in accounting policy?
A. 300,000 decrease C. 210,000 decrease
B. 800,000 decrease D. 560,000 decrease

5. KARDEL CORP. had used the FIFO method of inventory valuation since it began operations in 2011. The entity
decided to change to the weighted average method for determining inventory costs at the beginning of 2014.
The following schedule shows year-end inventory balances under the FIFO and weighted average method:
Year FIFO Weighted average
2011 4,500,000 5,400,000
2012 7,800,000 7,100,000
2013 8,300,000 7,800,000

What amount, before income tax, should be reported in the statement of retained earnings for 2014 as the
cumulative effect of the change in accounting policy?
A. 300,000 decrease C. 500,000 decrease
B. 300,000 increase D. 500,000 increase

Use the following information in answering the next item (s):

The following errors and omissions pertain to the records of PUDGE CORP. and summarized below:
12/31/06 12/31/05
Salaries payable P780,000 P873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
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) 561,000 470,400
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%) 522,000 564,000
6. What is the total effect of the errors on the 2005 net income?
A. Understated by P775,800 C. Understated by P1,236,600
B. Overstated by P165,000 D. Overstated by P80,400

7. What is the total effect of the errors on the 2006 net income?
A. Understated by P376,500 C. Understated by P320,100
B. Overstated by P324,300 D. Overstated by P380,700

8. What is the total effect of the errors on the company’s working capital at December 31, 2006?
A. Understated by P301,800 C. Understated by P265,800
B. Overstated by P119,400 D. Overstated by P820,200
9. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2006?
A. Understated by P155,100 C. Understated by P265,800
B. Overstated by P930,900 D. Understated by P855,900
10. OGRE MAGI CORP. began operations on January 1, 2012. Financial statements for the years ended December 31,
2012 and 2013 contained the following errors:
2012 2013
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

In addition, on December 31, 2013, fully depreciated machinery was sold for PI08,000 cash, but the sale was not
recorded until 2014. There were no other errors during 2012 or 2013 and no corrections have been made for any
of the errors. Ignoring income tax, what is the total effect of the errors on the amount of working capital on
December 31, 2013?
A. 42,000 overstated C. 60,000 understated
B. 58,000 understated D. 98,000 understated

- END OF HANDOUTS –

CASH TO ACCRUAL BASIS

DISCUSSION EXERCISES

STRAIGHT PROBLEMS

1. The following information relates to WOLF CORP. for the year ended 2020:
Cash sales gross P250,000
Trade accounts receivable – beginning 300,000
Trade accounts receivable – ending 200,000
Advances from customers increased by 80,000
Trade notes receivable increased by 150,000
Collections on receivables 500,000
Sales returns and discounts (inclusive of P5,000 payments to customers 10,000
Write-offs of accounts receivable 5,000
Recoveries of accounts receivable written-off (included in collections) 2,000
Trade notes receivable discounted (notes receivable was credited) 15,000

REQUIREMENT: What is the net sales under cash and accrual basis of accounting?

2. The following information relates to ELEPHANT INC. for the year ended 2020:
Cash purchases – gross P300,000
Trade accounts payable – beginning 500,000
Trade accounts payable – ending 400,000
Trade notes payable decreased by 200,000
Cash payments on payables 1,000,000
Purchase return and discounts (inclusive of P15,000 receipts from suppliers) 20,000
Inventory increased by 100,000

REQUIREMENT: Compute the net purchases and cost of goods sold under cash and accrual basis of accounting.

3. Under the accrual basis, rental income of HAWK CORP. for the calendar year 2014 is P600,000. Additional
information regarding rental income are presented below:
Unearned rental income, January 1, 2020 P50,000
Unearned rental income, December 31, 2020 75,000
Accrued rental income, January 1, 2020 30,000
Accrued rental income, December 31, 2020 40,000

REQUIREMENT: Under the cash basis, how much rental income should be reported by HAWK CORP. in year 2020?

4. EAGLE CORP. provided the following data for the current year:
Operating expenses:
Depreciation 1,000,000
Insurance 700,000
Salaries 1,500,000
Total operating expenses 3,200,000
December 31 January 1
Prepaid insurance 200,000 150,000
Accrued salaries payable 100,000 120,000

REQUIREMENT: What amount was paid for operating expenses?

5. An analysis of incomplete records of MAYA INCORPORATED produced the following information applicable to
2013:
Summary of cash transactions were as follows:
CASH RECEIPTS:
Collection on accounts receivable 27,600,000
Collection on notes receivable 2,400,000
Purchase returns and allowances (note a) 500,000
Recovery of previously written off accounts
(not included in the collections on
accounts receivable above, note b) 70,000
CASH DISBURSEMENT:
Payments on accounts payable 13,200,000
Payments of notes payable, trade 2,300,000
 Sales returns and allowances (note c) 400,000
Insurance 700,000
Salaries. 10,000,000
Other expenses 1,500,000
Dividends. 1,000,000
Additional information :
a) Total purchase returns and allowances amounted to P800,000. Purchase discounts taken was at P350,000.
b) Write-off of accounts receivable during the year amounted to P310,000.
c) Total sales returns and allowances amounted to P1,200,000. Sales discounts taken by customers was at
P1,800,000.
d) The following information regarding increases and decreases in relevant balance sheet accounts were also
ascertained:
ACCOUNT INCREASES ACCOUNT DECREASES
Cash ?
Accounts receivable 1,400,000 Inventory 1,000,000
Allow for bad debts. 180,000 Notes receivable 600,000
Accounts payable 850,000 Accrued salaries 330,000
Prepaid insurance 200,000 Notes payable-trade 950,000
Accum. Depr. 900,000
REQUIREMENTS: Determine the audited balances under accrual basis of the following:
(a) Gross sales
(b) Gross purchases
(c) Gross profit
(d) Bad debt expense
(e) Net income

PROBLEMS
1. HAWK CORP. reported the following balances on December 31:
12/31/2013 12/31/2012
Inventory 2,600,000 2,900,000
Accounts payable 750,000 500,000
The entity paid suppliers P4,900,000 during the year ended December 31,2013. Under accrual basis, what
amount should be reported for cost of goods sold in 2013?
A. 4,350,000 C. 4,950,000
B. 4,850,000 D. 5,450,000

Use the following information in answering the next item(s):

The following information relates to PARROT CORP. for the year ended 2018:
Cash sales gross P500,000
Trade accounts receivable – beginning 600,000
Trade accounts receivable – ending 400,000
Trade notes receivable increased by 300,000
Collections on receivables 1,000,000
Sales returns and discounts (inclusive of P5,000 payments to customers) 20,000
Write-offs of accounts receivable 10,000
Recoveries of accounts receivable written-off (included in collections) 4,000
Trade notes receivable discounted (notes receivable was credited) 30,000

2. What are the net sales under cash basis of accounting?

A. 1,530,000 C. 1,500,000
B. 1,000,000 D. 1,495,000
3. What are the net sales under accrual basis of accounting?
A. 1,500,000 C. 1,631,000
B. 1,151,000 D. 1,495,000

4. EAGLE CORP. owns an office building and leases the offices under a variety of rental agreements involving rent
paid in advance monthly or annually. Not all tenants make timely payments of their rent. The following data
were taken from the balance sheets of EAGLE CORP.:
Rentals receivable were P96,000 and P124,000 for 2013 and 2014, respectively; Unearned rentals were
P320,000 and P240,000 for 2013 and 2014, respectively. During 2014, EAGLE received P800,000 cash from
tenants. What amount of rental revenue should EAGLE record for 2014?
A. P692,000 C. P852,000
B. P748,000 D. P908,000

5. SWAN CORP. experienced the following changes in selected accounts for the current year:
Accrual sales 5,000,000
Accounts receivable:
January 1 800,000
December 31 500,000
Advances from customers:
January 1 300,000
December 31 400,000

What total amount of cash was received from customers during the year?
A. 4,600,000 C. 5,300,000
B. 4,800,000 D. 5,400,000

Use the following information in answering the next item(s):

The selected balance sheet information for the DUCK CORP. at November 30 and December 31, 2011, is
presented below. The company uses the perpetual inventory system and all sales to customer were made on
credit.
November 30 December 31

Debit Credit Debit Credit

Accounts receivable P10,000 P3,000

 Prepaid insurance 5,000 7,500

Inventory 7,000 6,000

Accounts payable 12,000 15,000

Wages payable 5,000 3,000

The following information is also available:

a) Cash collected from credit customers amounted to P80,000.
b) Cash paid for insurance amounted to P5,000.
c) Cash paid to suppliers of inventories amounted to P60,000. The accounts payable account pertains to
purchase of inventories
d) Cash paid to employees for salaries amounted to P10,000.
REQUIREMENTS: Determine the following under the accrual basis.

6. Sales revenue
A. 73,000 C. 83,000
B. 80,000 D. 87,000

7. Cost of sales
A. 60,000 C. 64,000
B. 63,000 D. 66,000

8. Insurance expense
A. 2,500 C. 7,500
B. 5,000 D. 10,000
9. Wage expense
A. 3,000 C. 8,000
B. 5,000 D. 10,000

10. In the accrual basis income statement for the year ended December 31, 2014, OSTRICH CORP. reported revenue
of P3,000,000.
Accounts receivable - January 1 400,000
Uncollectible accounts written off 20,000
Accounts receivable - December 31 500,000

Under cash basis, what amount should be reported as revenue for the current year?
A. 2,880,000 C. 3,000,000
B. 2,900,000 D. 3,120,000