: Problem 5

You are assigned to audit the financial statements of Rhea Corp. for the first time for the period ended

December 31, 2020. In line with your audit, the following information were made available:

a. A collection for rental amounting to P45,000 of one of its idle properties covering the period

July 1, 2019 to June 30, 2020 was received and recorded as rent income in in July 1, 2019.

b. The following were consistently omitted at each year end.

2018 2019 2020

Salaries payable 5,500 3,600 9,900

Unused office supplies 5,400 9,000 6,100

Accrued royalty income 4,000 7,900 5,400

c. The following deliveries were made to customers at each year-end, but were recorded as sales

only upon cash collection the following year. All sales were made FOB Shipping Point and the

related inventories were included in the physical count conducted every December 31:

2018 2019 2020

Sales price 28,000 30,000 22,000

Cost of goods 15,400 17,400 13,200

d. A major repair cost improving the operating efficiency of an equipment was incurred at the

beginning of 2018. The cost amounting to P55,000 was recognized as an outright repairs and

maintenance expense. The equipment was acquired on January 2014 with a total useful life of

15 years.

e. Dividend amounting to P120,000 was declared on December 20, 2020 to stockholders as of

the same date and were recorded upon payment the following year January 20, 2021.

f. The general ledger of the company's accumulated profits account contained the following

information:

Date Particulars Debit Credit

1/1/18 Balance 625,400

1/3/18 Excess over par for ordinary shares issued 120,000

12/31/18 Net loss for the year 177,400

1/5/19 FMV of land donated by a majority stockholder 480,000

12/31/19 Net income for the year 214,300

1/3/20 Cash dividend payment, declared in 12/20/19 90,000

12/30/20 Loss on sale of an equipment 22,500

12/31/20 Net income for the year 421,700

12/31/20 Balance 1,571,500

Requirements:

21. What is the adjusted net loss for 2018?

a. (95,900) c. (95,500)

b. (110,900) d. (115,900)

22. What is the adjusted net income for 2019?

a. 218,700 c. 191,200

b. 198,200 d. 196,200

23. What is the adjusted net income for 2020?

a. 423,700 c. 406,200

b. 419,500 d. 401,200

24. What is the correct retained earnings ending balance 2020?

a. 901,900 c. 1,021,900

b. 924,400 d. 956,900

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

a. 109,600 overstated c. 10,400 understated

b. 96,500 overstated d. 23,600 understated