AUDITING AND ASSURANCE - CONCEPTS AND APPLICATIONS 1 AP02 - ERROR CORRECTION AND ACCOUNTING CHANGES PROBLEM 1 You were engaged by Sabang 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 2020 and 2021. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: Prepaid insurance Interest receivable Salaries payable 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) 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%) December 31, 2020 P192,000 129,600 436,800 235,200 December 31, 2021 P153,900 106,500 390,000 280,500 282,000 261,000 REQUIREMENTS: Determine the following based on the above. 1. The net effect of the errors on the 2020 net income. 2. The net effect of the errors on the 2021 net income. 3. The net effect of the errors on the balance of the company's retained earnings at December 31, 2020. 4. The net effect of the errors on the balance of the company's retained earnings at December 31, 2021. 5. The net effect of the errors on the company's working capital at December 31, 2020. 6. The net effect of the errors on the company's working capital at December 31, 2021. PROBLEM 2 Tagudin Company's December 31, 2021 financial statement contained the following errors: Depreciation expense Ending inventory December 31, 2020 P40,000 understated 200,000 understated December 31, 2021 P180,000 overstated An insurance premium of P150,000 was prepaid in 2020 covering the years 2020, 2021, and 2022. The same was charged to expense in full in 2020. In addition, on December 31, 2021, a fully depreciated machinery was sold for P320,000 cash, but the sale was not recorded until 2022. There were no other errors during 2020, 2021, and 2022 and no corrections have been made for any of the errors. REQUIREMENTS: Determine the following based on the above and ignore income tax considerations. 1. The net effect of the errors on the 2020 net income. 2. The net effect of the errors on the 2021 net income. 3. The net effect of the errors on the balance of the company's retained earnings at December 31, 2020. 4. The net effect of the errors on the balance of the company's retained earnings at December 31, 2021. 5. The net effect of the errors on the company's working capital at December 31, 2021. PROBLEM 3 You were asked to audit the financial statement of Victoria Company as of and for the period ended December 31, 2021. This is the first time Victoria Company's financial statements are being audited since it started operation in 2019. The following summarizes your audit findings: An equipment with a cost of P400,000 was fully expensed in September 30, 2019. Based on your discussions with the management, the cost should have been capitalized and depreciated using straight-line method over its 8-year useful life. A three-year fire insurance amounting to P180,000 was paid and recognized as expense on June 30, 2019. The insurance however covers the period July 1, 2019 to June 30, 2022. . . The following items were omitted at each year end: 2019 Unearned rent income 2020 P20,000 2021 P40,000 Unused supplies Accrued salaries P30,000 50,000 25,000 90,000 120,000 The following is an analysis of the company's retained earnings account: Date Particulars Debit Credit Balance AUDITING AND ASSURANCE - CONCEPTS AND APPLICATIONS 1 1 December 31, 2019 December 31, 2020 January 31, 2021 2018 Net loss P200,000 (P200,000) 2019 Net income Dividends paid P600,000 400,000 300,000 100,000 2020 Net income 900,000 1,000,000 December 31, 2021 No dividends were declared in 2019. Dividends declared in December 2020 and 2021 were paid on January of the following years. The 2021 dividends were at P500,000. REQUIREMENTS: Determine the following based on the above. 1. The net effect of the errors on the 2019 net loss. 2. The net effect of the errors on the 2020 net income. 3. The net effect of the errors on the 2021 net income. P320,000 cash, but the sale was not recorded until 2022. There were no other errors during 2020, 2021, and 2022 and no corrections have been made for any of the errors. REQUIREMENTS: Determine the following based on the above and ignore income tax considerations. 1. The net effect of the errors on the 2020 net income. 2. The net effect of the errors on the 2021 net income. 3. The net effect of the errors on the balance of the company's retained earnings at December 31, 2020. 4. The net effect of the errors on the balance of the company's retained earnings at December 31, 2021. 5. The net effect of the errors on the company's working capital at December 31, 2021. PROBLEM 3 You were asked to audit the financial statement of Victoria Company as of and for the period ended December 31, 2021. This is the first time Victoria Company's financial statements are being audited since it started operation in 2019. The following summarizes your audit findings: An equipment with a cost of P400,000 was fully expensed in September 30, 2019. Based on your discussions with the management, the cost should have been capitalized and depreciated using straight-line method over its 8-year useful life. A three-year fire insurance amounting to P180,000 was paid and recognized as expense on June 30, 2019. The insurance however covers the period July 1, 2019 to June 30, 2022. The following items were omitted at each year end: . 2019 Unearned rent income Unused supplies 2020 P20,000 Accrued salaries P30,000 50,000 90,000 The following is an analysis of the company's retained earnings account: Date Particulars Debit Credit 2021 P40,000 25,000 120,000 Balance AUDITING AND ASSURANCE - CONCEPTS AND APPLICATIONS 1 1 December 31, 2019 December 31, 2020 January 31, 2021 2018 Net loss 2019 Net income Dividends paid P200,000 (P200,000) P600,000 400,000 300,000 100,000 December 31, 2021 2020 Net income 900,000 1,000,000 No dividends were declared in 2019. Dividends declared in December 2020 and 2021 were paid on January of the following years. The 2021 dividends were at P500,000. REQUIREMENTS: Determine the following based on the above. 1. The net effect of the errors on the 2019 net loss. 2. The net effect of the errors on the 2020 net income. 3. The net effect of the errors on the 2021 net income. 4. The net effect of the errors on the balance of the company's retained earnings at December 31, 2019. 5. The net effect of the errors on the balance of the company's retained earnings at December 31, 2020. 6. The net effect of the errors on the balance of the company's retained earnings at December 31, 2021. 7. The net effect of the errors on the company's working capital at December 31, 2019. 8. The net effect of the errors on the company's working capital at December 31, 2020. 9. The net effect of the errors on the company's working capital at December 31, 2021. 10. The adjusted balance of net income in 2019. 11. The adjusted balance of net income in 2020. 12. The adjusted balance of net income in 2021. 13. The adjusted balance of retained earnings in 2019. 14. The adjusted balance of retained earnings in 2020. 15. The adjusted balance of retained earnings in 2021. PROBLEM 4 Calarayan Company decided on January 2, 2021 to review its 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 January 1, 2021. Calarayan Company decided to change its allowance for doubtful accounts from 2% to 4% of its outstanding receivable balance. Calarayan's receivable balance at December 31, 2021 was P345,000. Allowance for doubtful accounts had a debit balance of P1,000 before adjustment. Calarayan decided to use the straight-line method of depreciation on its equipment instead of the sum-of-the years'-digit method. It was also decided that this asset has 10 more years of useful-life as of January 1, 2021. The equipment was purchased on January 1, 2011, at a cost of P1,100,000. On the date of acquisition, it was estimated that the equipment would have a 15-year useful life with no residual value. REQUIREMENTS: Determine the following based on the above. 1. The required balance of allowance for doubtful account for the current. 2. The entry to record the adjustment of provision for doubtful accounts for the current year. 3. The carrying amount of the equipment as of January 2, 2021. 4. The amount of depreciation on equipment for the current year. 5. The carrying amount of the equipment as of January 2, 2022. PROBLEM 5 Jubasan Incorporated has been using the FIFO method of inventory costing since it began operations in 2020. In 2021, the company decided to change to the weighted average method. The following are the December 31 inventory balances under each method. 2020 2021 FIFO Weighted Average P225,000 447,500 280,000 499,500 REQUIREMENTS: Determine the following based on the above. 1. The net adjustment on the beginning balance of company's retained earnings account. 2. The entry to record, if any, that should be made to record the change in inventory costing method. ***END OF DISCUSSION*** ***If you get TIRED, learn to REST, not to QUIT***