FRITZIE CORPORATION

Problem 8

You were assigned to audit the financial statements of Fritzie Corp. as of and for the period ended

December 31, 2020. This is the first time Fritzie Corp.'s financial statements are being audited since it

started operations in 2018. The following summarizes your audit findings:

a. The following is an analysis of the company's accumulated profits account:

Date Particulars Debit Credit Balance

12/31/18 2018 Net loss 140,000 (140,000)

12/31/19 2019 Net Income 690,000 550,000

1/31/20 Payment of dividends 300,000 250,000

12/31/20 2020 Net Income 925,000 1,175,000

b. No dividends were declared in 2018. Dividends declared in December 2019 and 2020 were

paid on January of the following years. The 2020 dividends were at P500,000.

c. The following items were omitted at each year end:

2018 2019 2020

Unearned royalty income P50,000 P40,000 P20,000

Prepaid advertising expense 30,000 - 25,000

Accrued utilities - 20,000 40,000

d. A three-year fire insurance amounting to P90,000 was paid and recognized as expense on

June 30, 2018. The insurance however covers the period July 1, 2018 to June 30, 2021.

e. An equipment with a cost of P240,000 was fully expensed in September 30, 2018. Based on

your discussions with the management, the cost should have been capitalized and depreciated

using straight-line method over its eight-year useful life.

Requirements:

37. What is the adjusted net income in 2018?

a. 317,500 c. 280,000

b. 147,500 d. 455,500

38. What is the adjusted net income in 2020?

a. 825,000 c. 890,000

b. 805,000 d. 895,000

39. What is the retroactive adjustment to the retained earnings beginning 2020?

a. 417,500 c. 112,500

b. 317,500 d. 92,500

40. What is the adjusted retained earnings on December 31, 2020?

a. 827,500 c. 952,500

b. 852,500 d. 982,500

41. What is the effect of the errors in 2020 working capital?

a. 20,000 over c. 520,000 under

b. 20,000 under d. 520,000 over

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