Problem 5 In early 2005, while reviewing THOMAS CORP.'s 2004 financial records, its accountant discovered several errors. For each of the error listed below, indicate the effect on net income for both 2003 and 2004 assuming no correction was made and the company uses the periodic system of inventory. 1. 2. 3. 4. 5. Goods shipped to consignee amounting to P2,500 in 2003 were reported as sales. Goods in the hands of the consignee at the end of 2003 were not recognized for inventory purposes. Sale of such goods in 2004 and collections on such sales were recorded as credits to receivables established with consignees in 2003. Insurance costs incurred amounting to P15,000 but unpaid in 2003 were not recorded until paid in 2004. The total of one week's sales amounting to P2,250 in 2003 was credited to Gain on sales- Machineries 2003 year end purchases of P10,000 were not recorded until the beginning of 2004. The inventory associated with these purchases was omitted from the ending inventory count in 2003. Machinery was sold in May of 2004, but the company continued to deduct depreciation for the remainder of 2004 although the asset was removed from the books in May. Cost of the asset purchased in October of 2001 was P12,500 and estimated to have a useful life of 10 years, The company follows the straight line method of computing depreciation. A check of P6,250 for January 2004 rent was received and recorded as revenue at the end of 2003. 2003 year end purchase of P7,500 of inventory were not recorded until the beginning of 2004 although the inventory was correctly counted at the end of 2003. Interest receivable of P1,500 in 2003 was not recorded until 2004. Interest accrued of P4,000 in 2003 on a note payable was not recorded until it was paid in 2004. Certain items of ending inventory amounting to P5,875 were accidentally not counted at the end of 2003. Goods sold on account in 2003 amounting to P5,000 were not recorded as sales until 2004. No depreciation amounting to P4,375 was taken in 2003 for equipment sold in April 2003. The company reports on a calendar year basis and computes depreciation to the nearest month. 6. 7. 8. 9. 10. 11. 12. REQUIREMENTS: Determine the effect of the above mentioned errors on the balance sheets and the income statement prepared in 2003 and 2004 and compute for the corrected income assuming reported income are as follows: 2003 500,000 2004 375,000 Problem 5 In early 2005, while reviewing THOMAS CORP.'s 2004 financial records, its accountant discovered several errors. For each of the error listed below, indicate the effect on net income for both 2003 and 2004 assuming no correction was made and the company uses the periodic system of inventory. 1. 2. 3. 4. 5. Goods shipped to consignee amounting to P2,500 in 2003 were reported as sales. Goods in the hands of the consignee at the end of 2003 were not recognized for inventory purposes. Sale of such goods in 2004 and collections on such sales were recorded as credits to receivables established with consignees in 2003. Insurance costs incurred amounting to P15,000 but unpaid in 2003 were not recorded until paid in 2004. The total of one week's sales amounting to P2,250 in 2003 was credited to Gain on sales- Machineries 2003 year end purchases of P10,000 were not recorded until the beginning of 2004. The inventory associated with these purchases was omitted from the ending inventory count in 2003. Machinery was sold in May of 2004, but the company continued to deduct depreciation for the remainder of 2004 although the asset was removed from the books in May. Cost of the asset purchased in October of 2001 was P12,500 and estimated to have a useful life of 10 years, The company follows the straight line method of computing depreciation. A check of P6,250 for January 2004 rent was received and recorded as revenue at the end of 2003. 2003 year end purchase of P7,500 of inventory were not recorded until the beginning of 2004 although the inventory was correctly counted at the end of 2003. Interest receivable of P1,500 in 2003 was not recorded until 2004. Interest accrued of P4,000 in 2003 on a note payable was not recorded until it was paid in 2004. Certain items of ending inventory amounting to P5,875 were accidentally not counted at the end of 2003. Goods sold on account in 2003 amounting to P5,000 were not recorded as sales until 2004. No depreciation amounting to P4,375 was taken in 2003 for equipment sold in April 2003. The company reports on a calendar year basis and computes depreciation to the nearest month. 6. 7. 8. 9. 10. 11. 12. REQUIREMENTS: Determine the effect of the above mentioned errors on the balance sheets and the income statement prepared in 2003 and 2004 and compute for the corrected income assuming reported income are as follows: 2003 500,000 2004 375,000