MODULE 7 -Post-test

ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES & ERRORS

1. Moon Corp presented the following information

2019 2020

Ending inventory 130,000 overstated 180,000 understated

Utilities expense 110,000 understated 125,000 overstated

Rent expense 120,000 understated 110,000 overstated

What amount would 2020 net income be overstated or understated if none of the errors were detected or corrected?

a. 360,000 overstated b. 360,000 understatedc. 545,000 overstated d. 545,000 understated

2. The following are the errors found in KJD's accounting records:

2020

2021

Ending Inventory

100,000 (overstated)

150,00 (understated)

Depreciation

50,000 (overstated)

100,000 (understated)

At what amount should the retained earnings be retrospectively adjusted on January 1, 2020?

a. Decrease by100,000

b. Increase by100,000

c. Decrease by150,000

d. Increase by150,000

3. Jerome company failed to recognize accruals and prepayments during its first year of operations. The pre-tax profit, accruals and prepayments at the end of the year were:

Pre-tax profit P 5,000,000

Items not recognized at year-end were as follows:

Prepaid Insurance 200,000

Accrued Wages 250,000

Rent Revenue collected in advance 300,000

Interest Receivable 100,000

The correct amount of pre-tax profit should be

a. P 4,750,000

b. P 4,950,000

c. P 5,000,000

d. P 5,250,000

4. The JP Company showed pre-tax income of P2,500,000 for the year ended December 31, 2020. On your year-end verification of the transactions of the company, you discovered the following errors:

( P1,000,000 worth of merchandise was purchased in 2020 and included in the ending inventory. However, the purchase was recorded only in 2021.

( A merchandise shipment at P1,500,000 was properly recorded as purchases at year end. The merchandise was inadvertently omitted from the physical count, since it has not arrived by December 31, 2020.

( Value added tax for the fourth quarter of 2020, amounting to P500,000, was included to the Sales account.

( Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2020. The entire amount was reported as revenue upon receipt.

( Rent paid on building covering the period from July 1, 2020 to July 1, 2021, amounting to P1,200,000, was paid and recorded as expense on July 1, 2020. The company did not make any adjustment at the end of the year.

1. The corrected pre-tax profit for 2020 should be

a. P2,400,000

b. P2,900,000

c. P3,000,000

d. P3,400,000

2. What is the net effect of the foregoing errors on the total assets at December 31, 2020?

a. P600,000 understated

b. P1,100,000 understated

c. P1,500,000 understated

d. P2,100,000 understated

3. What is the total understatement of the total liabilities at December 31, 2020?

a. P 3,200,00.00

b. P 1,700,00.00

c. P 1,500,00.00

d. P 1,200,000.00

5. Upon inspection of the records of J0shtin Company, the following facts were discovered for the year ended December 31, 2020:

( A fire insurance premium of P 40,000 was paid and charged as insurance expense in 2020. The fire insurance policy covers one year from April 1, 2020.

( Inventory on January 1, 2020 was understated by P 80,000.

( Inventory on December 31, 2020 was understated by P 120,000.

( Expenses of P 55,000 incurred during December were recorded when paid in January 2021

( On December 5, 2020, J0shtin credited to sales a cash advance of P 100,000 received from a customer for goods delivered in January 2021. The company's gross profit on sales is 40%

( The profit of J0shtin Company for the year ended December 31, 2020, before any adjustment from the above information, is P 1,550,000.

What is the adjusted profit of J0shtin Company for the year ended December 31, 2020?

a. 1,365,000

b. 1,425,000

c. 1,445,000

d. 1,505,000

6. Joshtin Inc. submitted to you the following information related to operations for 2020:

Revenue from Sales 7,000,000

Expenses 4,000,000

Income before Income taxes3,000,000

In reviewing the records, you discovered the following items:

( During 2020, the company discovered an error in Depreciation in 2019. The correction of this error, which has not been recorded, will result in an increase in depreciation for 2019 of200,000.

( During 2020, the company sustained a loss of P 400,000 because of flood, which destroyed its inventory. The company charged retained earnings and credited inventory of P 400,000.

How much is the correct profit before tax for the year 2020?

a. 2,400,000

b. 2,600,000

c. 3,000,000

d. 3,400,000

7. Mint Co. started operations at the beginning of the current year. The entity failed to recognize accruals and prepayments at the end of reporting period. The income before tax, accrual and prepayments at the end of the current year are:

Income before tax

4,100,000

Prepaid insurance

60,000

Accrued wages

75,000

Rent revenue collected in advance

90,000

Interest receivable

150,000

What is the corrected income before tax?

a. 4,145,000

b. 3,995,000

c. 7,895,000

d. 4,025,000

8. Ricoa Company sold imported chocolates for P900,000 to Goya Company on December 31, 2020. The terms of sale were net 30, FOB shipping point. The chocolates were shipped on December 31, 2020 and arrived at Goya on January 5, 2021. Due to a clerical error, the sale was not recorded until January 2021 and the merchandise sold at 20% markup on cost was included in inventory on December 31, 2020. What was the effect of the errors on cost of goods sold for 2020?

a. Understated by P900,000

b. Understated by P750,000

c. Understated by P150,000

d. No correction

9. ZZZ Company is in the process of adjusting the books at the end of 2021. The accounting records revealed the following inlormation:

Errors in ending inventory for the last three years were discovered to be as follows:

2019 - 430,000 understated

2020 - 410,000 overstated

2021 - 280,000 understated

The entity failed to accrue sales commissions at the end of 2019 and 2020 as follows:

2019 - 260,000

2020 - 320,000

In each case, the sales commissions were paid and expensed in January of the following year. The unadjusted retained earnings balance on January 1, 2021 is P13,500,000 and the unadjusted net income for 2021 was P5,000,000.

1.What is the adjusted net income for 2021?

a. 6,230,000

b. 6,010,000

c. 6,180.000

d. 6,030,000

2.What is the net correction for 2019 and 2020?

a. 160,000 and 890,000

b. 150,000 and 780,000

c. 170,000 and 760,000

d. 170,000 and 850,000

3.What is the adjusted retained earnings on December 2021?

a. 18,780,000

b. 18,790,000

c. 18,800,000

d. 18,810,000

10. On January 1, year 1, Warren Co. purchased a 600,000 machine, with a five-year useful life and no salvage value. The machine was depreciated by an accelerated method for book and tax purposes. The machine's carrying amount was 240,000 on December 31, year 2. On January 1, year 3, Warren changed to the straight-line method for financial reporting purposes. Warren can justify the change. Warren's income tax rate is 30%.

Q1. In its year 3 income statement, what amount should Warren report as the cumulative effect of this change?

a. 120,000

b.84,000

c.36,000

d.0

Q2. On January 1, year 3, what amount should Warren report as deferred income tax liability as a result of the change?

a. 120,000

b.72,000

c.36,000

d.0

11. Chen Co. purchased an equipment at the beginning of 2020 for500,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of20,000. The equipment was depreciated using the straight-line method of depreciation through 2021. At the beginning of 2022, the estimate of useful life was revised to a total life of nine years and the expected salvage value was changed to40,000. What is the amount to be recorded for depreciation for 2022 after reflecting these changes in estimates?

a. 37,777

b. 50,000

c. 51,111

d. 80,000

12. Chicago Company began operations on January 1, 2019, and uses the FIFO method in costing its raw material inventory. Management is contemplating a change to the LIFO method and is interested in determining what effect such a change will have on net income. Accordingly, the following information has been developed:

Final Inventory20192020

FIFOP640,000P712,000

LIFO560,000636,000

Net Income (computed under the FIFO method)980,0001,080,000

Based on the above information, a change to the LIFO method in 2020 would result in net income for 2020 of

a. 1,120,000.

b. 1,080,000.

c. 1,004,000.

d. 1,000,000.

13. Tictac Company reported shareholders' equity of 7,500,000 on December 31, 2021.The company revealed the following transactions during the year:

( Net income for 2021 - 4,500,000

( Dividend declared, of which 500,000 was paid - 2,300,000

( An adjustment of retained earnings for 2020 under depreciation of 450,000.

( Gain on sale of treasury shares - 300,000

( The share capital balance of 5,000,000 remained unchanged during the year.

What is the balance of retained earnings on January 1, 2021?

a. 400,000

b. 450,000

c. 500,000

d. 550,000

14. In 2020, Oreo Co. discovered that the machinery purchased on January 1, 2018 of 2,000,000 was expensed at that time. The machinery should have been depreciated over 5 years with no residual value. The tax rate is 30%. What is the correct entry for retained earnings in 2020?

a. debit 840,000

b. credit 840,000

c. debit 800,000

d. credit 800,000

15. Jongdae Kim's musical instruments shop began on January 2021. However, the accountant he hired failed to recognize accruals and prepayments at the end of the year. The following data are gathered regarding the matter:

Income, before tax

2,100,000

Prepaid Insurance

61,000

Advances to Suppliers

99,000

Salaries Payable

14,000

Interest Receivable

4,000

Advances Payments from customers recognized as Sales

112,000

What amounted should be recorded as the correct income after recording the adjustments?

a. 2,039,000 c. 2,130,000

b. 2,062,000 d. 2,138,000