Flat Tops Corporation reported the following amounts of net income for the years ended December 31, 2006, 2007, and 2008: 2006 P127,000 2007 150,000 2008 128,500 You are performing the audit for the year ended December 31, 2008. During your examination, you discovered the following errors: a. As a result of errors in the physical count, ending inventories were misstated as follows: December 31, 2007 14,000 understated December 31, 2008 23,000 overstated b. On December 29, 2008, Flat Tops recorded as a purchase, merchandise in transit which cost P15,000. The merchandise was shipped FOB Destination and not arrived by December 31. The merchandise was not included in the ending inventory. C. Flat Tops records sales on the accrual basis but failed to record sales on account made near the end of each year as follows 2006 P4,000 2007 5,000 2008 3,500 d. The company failed to record accrues office salaries as follows: December 31, 2006 P10,000 December 31, 2007 14,000 e. On March 1, 2007, a 10% stock dividend was declared and distributed. The par value of the shares amounted to P10,000 and market value was P13,000. The stock was recorded as follows: Miscellaneous expense 13,000 Common stock 10,000 Retained earnings 3,000 On July 1, 2007, Flat Tops acquired a three-year insurance policy. The three-year premium of P6,000 was paid on that date, and the entire premium was recorded as insurance expense. g. On January 1, 2008, Flat Tops retired bonds with a book value of P120,000 for P106,000. The gain was incorrectly deferred and is being amortized over 10 years as a reduction of interest expense on other outstanding obligations. 1. What is the adjusted net income for the year ended December 31, 2006? A. P133,000 C. P121,000 B P117,000 D. P113,000 2. What is the adjusted net income for the year ended December 31, 2007? A. P159,000 C. P178,000 B. P187,000 D. P179,000 3. What is the adjusted net income for the year ended December 31, 2008? A. P129,600 C. P104,400 B. P131,000 D. P139,600Suggested solution: 2006 2007 2008 127,000 150,000 128,500 a. 2007 2008 b. 2008 2006 2007 2008 d. 2006 2007 e. 2007 2007 g. 2008 4. What adjusting entry should be made on December 31, 2008 to correct the error described in item B? A. Debit Accounts payable, P15,000; Credit Purchases, P15,000 B. Debit Purchases, P15,000; Credit Accounts Payable, 15,000 C. Debit Accounts payable, P15,000; Credit Cash, P15,000 D. No adjusting journal entry is necessary. 5. The adjusting entry on December 31, 2007 to correct the error described in item E should include a debit to A. Common stock, P10,000 C. Share premium, P3,000 B. Retained earnings, P16,000 D. Miscellaneous expense, P3,000