7-9

You were engaged by DIANE Company to audit its financial statements for the first time. In examining the books, you noted that certain adjustments had been overlooked at the end of 2020 and 2021. You also discovered that other items had been improperly recorded. These omissions and other errors for each year were summarized:

	12-31-2021	12-31-2020
Salaries Payable	780,000	873,600
Interest Receivable	213,000	259,200
Prepaid Insurance	307,800	384,000
Advances from Customers	561,000	470,400
(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)
Machinery	522,000	564,000
(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%)

1. The necessary adjusting journal entry for the error in recording capital expenditures on Machinery as of December 31, 2020 would include:

Group of answer choices

a. A credit to retained earnings of P535,800

b. none of the choices

c. A debit to Depreciation expense of P54,300

d. A credit to Accumulated Depreciation of P82,500

A debit to Machinery of P522,000

2. What is the total effect of the errors on the 2020 net income?

Group of answer choices

a. none of the choices

b. Overstated by P165,000

c. Overstated by P80,400

d. Understated by P775,800

e. Understated by P1,236,600

3. What is the total effect of the errors on the 2021 net income?

Group of answer choices

a. Overstated by P324,300

b. Overstated by P380,700

c. Understated by P376,500

d. none of the choices

e. Understated by P320,100