AUDIT OF PRIOR PERIOD ERRORS

J. VILLENA, CPA
PROBLEM 1
You were engaged by LOVE COMPANY to audit its financial statements for the first time. In
examining the books, you noted that certain adjustments had been overlooked at the end of 2015
and 2016. You also discovered that other items had been improperly recorded. These omissions and
other errors for each year are summarized below:
Salaries Payable
Interest Receivable
Prepaid Insurance
Advances from Customers
(Collections from customers had been recorded as
sales but should have been recognized as advances
from customers because goods were not shipped
until the following year)
Machinery
(Capital expenditures had been recorded as repairs
but should have been charged to Machinery; the
depreciation rate is 10% per year, but depreciation
in the year of expenditure is to be recognized at 5%)

12-31-16
780,000
213,000
307,800
561,000

12-31-15
873,600
259,200
384,000
470,400

522,000

564,000

Required
1. What is the total effect of the errors on the 2015 net income?
A. Understated by P1,236,600
C. Overstated by P80,400
B. Understated by P755,800
D. Overstated by P165,000
2. What is the total effect of the errors on the 2016 net income?
A. Understated by P320,100
C. Overstated by P324,300
B. Understated by P376,500
D. Overstated by P380,700
3. What is the total effect of the errors on the companys working capital at Dec. 31, 2016?
A. Understated by P265,800
C. Overstated by P820,200
B. Understated by P301,800
D. Overstated by P119,400
4. What is the total effect of the errors on the balance of the companys retained earnings at
Dec. 31, 2016?
A. Overstated by P855,900
C. Understated by P155,100
B. Overstated by P930,900
D. Understated by P265,800
5. The necessary adjusting journal entry for the error in recording capital expenditures on
Machinery as of December 31, 2016, would include:
A. A credit to Retained Earnings of P535,800
B. A credit to Accumulated Depreciation of P82,500
C. A debit to Depreciation Expense of P54,300
D. A debit to Machinery of P522,000
PROBLEM 2
ZIA, INC. has used the accrual basis of accounting for several years. A review of the records,
however, indicates that some expenses and revenues have been handled on a cash basis because
of errors made by an inexperienced bookkeeper. Income statements prepared by the bookkeeper
reported P530,000 net income for 2015 and P999,000 net income for 2016. Further examination of
the records reveals that the following items were handled improperly.
1. Rent was received from a tenant in December 2015. The amount P120,000, was recorded as
income at that time even though the rental pertained to 2016.
2. Wages Payable on December 31 have been consistently omitted from the records of that
date and have been entered as expenses when paid in the following year. The amounts of
accruals recorded in this manner were:
December 31, 2014
December 31, 2015
December 31, 2016
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P33,000
P36,000
P28,200
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AUDIT OF PRIOR PERIOD ERRORS

J. VILLENA, CPA
3. Invoices for office supplies purchased have been charged to expense accounts when
received. Inventories of supplies on hand at the end of each year have been ignored, and no
entry has been made for them
December 31, 2014
December 31, 2015
December 31, 2016

P39,000
P28,200
P42,600

Required:
1. What is the corrected net income for the year 2015?
A. P636,200
C. P396,200
B. P402,200
D. P417,800
2. What is the corrected net income for the year 2016?
A. P901,200
C. P1,112,400
B. P1,141,200
D. P1,125,600
PROBLEM 3
You are auditing the financial statements of JAPX Corp. for the year ended December 31, 2016. The
companys income statements indicated the following net income.
2014 P1,200,000
2015 P1,490,000
2016 P1,325,000
An examination of the accounting records for the year ended December 31, 2016 indicates that
several errors were made. The following errors were discovered.
A. Unused supplies at the end of the year were consistently omitted.
2013
2014
2015
2016

P95,000
P110,000
P100,000
P140,000

B. The footings and extensions showed that the inventory on December 31, 2015 was
overstated by P80,000.
C. P105,000 worth of inventories were received on January 4, 2017 and were not included in
the physical count as of December 31, 2016. Upon investigation, however, you discovered
that these goods were shipped by the supplier on December 30, 2014 FOB shipping point.
The invoice for the goods were recorded in the purchase journal only upon receipts of goods
in 2017.
D. The following advance collections from customers at the end of the year were recorded as
cash sales upon receipt of cash. Goods were delivered to the customers the following year.
2014 P120,000
2015 P150,000
2016 P160,000
E. On July 5, 2014, the company accepted an equipment from Janna Corp. as a donation. The
donation from Janna Corp. an unaffiliated company was unconditional. The fair market value
of the equipment was P240,000 and has a remaining useful life of 6 years. Japx Corp.
recorded the equipment at P60,000 which was the incidental costs incurred to bring the
donated asset to its present location and condition necessary for operational use. The asset
was then depreciated over its remaining life using SLM without residual value.

Required:
1. What is the correct depreciation expense on the equipment in 2016?
A. None
C. P 40,000
B. P30,000
D. P 50,000
2. What is the correct net income in 2014?
A. P1,075,000
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C. P1,315,000
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AUDIT OF PRIOR PERIOD ERRORS

J. VILLENA, CPA
B. P1,295,000

D.

1,335,000
3. What is the correct net income in 2015?
A. P 1,330,000
B. P 1,460,000

C. P1,410,000
D. P 1,370,000

4. What is the correct net income in 2016?

A. P 1,435,000
B. P 1,290,000

C. P 1,500,000
D. P 1,395,000

5. What is the retrospective adjustment to retained earnings as a result of your audit in 2016?
A. P 130,000 debit
C. P 155,000 credit
B. P 55,000 debit
D. P 50,000 credit

-END of 0401-

-The pain of today is the strength of

tomorrow.

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