Part 2. Error Correction The partnership agreement of Gascon, Pahilagao, and Nolasco written in 20000 specifies that profits and losses are determined on the accrual basis and are divided as follows: Gascon Pahilagao Nolasco Total Salary allowances P 150,000 P 150.000 P 50.000 P 350,000 Bonuses (percentage of profits 20% 20% in excess of P900.000) Residual profit or loss 40% 40% 20% 7 On January 1, 2021, the partnership agreement was revised to provide for the sharing of profits or losses in the following manner: Gascon Pahilagao Nolasco Total Salary allowances P 200.000 P 200,000 P 150.000 P 550,000 Bonuses (percentage of profits 20% 20% 10% in excess of P1.100.000) Residual profit or loss 35% 35% 30% The partnership books showed a profit of P1,450,000 for 2021 before the following errors were discovered: Inventory as of December 31, 2019 was overstated by P70,000 Inventory as of December 31, 2020 was understated by P80,000 Inventory as of December 31, 2021 was understated by P180,000 Depreciation expense for 2021 was understated by P50,000 Required: a. Divide the profits among the partners for 2021, with the effects of prior years' errors to be treated as adjustments to beginning capital balances. b. Assume that the reported profits for 2019 and 2020 were P850,000 and P1,100,000 respectively, prepare the correcting entry on January 1, 2021. The old profit sharing agreement is used for these items