Correction of Errors

The partnership agreement of Gascon, Pahilagao, and Nolasco written in 2000 specifies that profits and losses are determined on the accrual basis and are dvided as follows:

Gascon Pahilagao Nolasco Total

Salary allowances P150,000 P150,000 P50,000 P350,000

Bonuses (percentage of profits in excess of

P90,000) 20% 20%

Residual profit or loss 40% 40% 20%

On Jan. 1, 2018, the partnership agreement was revised to provide for the sharing of profits or losses in the following manner:

Gascon Pahilagao Nolasco Total

Salary allowances P200,000 P200,000 P150,000 P550,000

Bonuses (percentage of profits in excess of

P110,000) 20% 20% 10%

Residual profit or loss 35% 32% 30%

The partnership books showed a profit of P1,450,000 for 2018 before the following errors were discovered:

a. Inventory at Dec. 31, 2016 was overstated by P70,000.

b. Inventory at Dec. 31, 2017 was understated by P80,000.

c. Inventory at Dec. 31, 2018 was understated by P180,000.

d. Depreciation expense for 2018 was understated by P50,000.

Required:

1. Divide the profits among the partners for 2018, with the effects of prior years' errors to be treated as adjustments to beginning capital balances.
2. Assume that the reported profits for 2016 and 2017 were P850,000 and P1,100,000, respectively, prepare the correcting entry on Jan. 1, 2018. The old profit-sharing agreement is used for these items.