Net income for Escudo Company for the years 2019 and 2020 is shown below. An audit of the

accounts, however, disclosed the following information:

2019 2020

Net income after tax P 24,650 P 31,250

Inventory understatement at year-end 2,500

Typewriter purchased at year-end charged

to expense (10-year life) 4,000

Merchandise purchased on account not

recorded as liability but included

in the inventory (5,000)

Unearned rent received taken up as income (1,800)

Accrued taxes unrecorded (3,000)

1. The correct net income for 2019 is

a. P23,650 b. P24,250 c. P28,250 d. P33,250

2. The correct net income for 2020 is

a. P33,550 b. P28,250 c. P25,350 d. P23,550

3. What is the effect of the above errors to the 2020 beginning retained earnings?

a. P1,400 overstated

b. P4,000 understated

c. P3,600 understated

d. P1,000 overstated

4. What is the effect of the above errors to 2020 working capital?

a. P2,300 understated

b. P2,300 overstated

c. P4,800 understated

d. P4,800 overstated

5. What is the effect of the 2019 errors to 2020 net income?

a. P400 overstatement

b. P400 understatement

c. P4,600 overstatement

d. P4,600 understatement

Use the following data in answering questions 1 through 5: Net income for Escudo Company for the years 2019 and 2020 is shown below. An audit of the accounts, however, disclosed the following information: 2019 2020 Net income after tax P 24,650 P 31,250 Inventory understatement at year-end 2,500 Typewriter purchased at year-end charged to expense (10-year life) 4,000 Merchandise purchased on account not recorded as liability but included in the inventory (5,000) Unearned rent received taken up as income (1,800) Accrued taxes unrecorded (3,000)