PROBLEM 11-Correction of Errors (Ocampo) Misamis Company's December 31, year-end financial statement contained the following errors: Ending Inventory Depreciation expense December 31, 2009 P 100,000 understated P 20,000 understated December 31, 2010 P90,000 overstated An Insurance premium of P75,000 was prepaid in 2009 covering the years 2009, 2010, and 2011. The same was charged to expense in full in 2009. In addition, on December 31, 2010, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2011. There were no other errors during 2009, 2010, and 2011 and no corrections have been made for any of the errors. Ignore income tax considerations. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the net effect of the errors on the 2009 profit? a. Understated by P 130,000 b. Understated by P 155,000 c. Overstated by P 70,000 d. No effect 2. What is the net effect of the errors on the 2010 profit? a. Overstated by P 55,000 b. Overstated by P 30,000 c. Overstated by P 215,000 d. Understated by P 45,000 3. What is the net effect of the errors on the company's working capital at December 31, 20107 a. Understated by P P95,000 b. Understated by P 70,000 c. Overstated by P 90,000 d. No effect 4. What is the net effect of the errors on the balance of the company's retained eamings at December 31, 2010? a. Understated by P 75,000 b. Understated by P 50,000 c. Overstated by P 110,000 d. No effect 5. What is the net effect of the errors on the company's working capital at December 31, 20117 a. Overstated by P 65,000 b. Understated by P 95,000 Answers: 1. A 2. A 3. A 4. A 5. D c. Understated by P 160,000 d. No effect Suggested Solutions: Questions No. 1 to 5 Profit 2009 Profit 2010 WC 12/31/10 RE WC 12/31/10 12/31/11 12/31/09 Inventory understated (100,000) 100,000 12/31/10 Inventory overstated 90,000 90,000 90,000 2009 depreciation understated 20,000 20,000 Insurance paid in 2009 in 3 years (50,000) 25,000 (25,000) (25,000) Sale of a fully depreciated machinery 2010 recorded in 2011 Over (under) in (160.000 (130,000) 55.000 (160.000) (160,000) 195.000 (75.000)