Name:

Problem 1
Walang Valentines, Inc. is a calendar-year corporation. Its financial statements for the
years 2018 and 2019 contained errors as follows:

2018 2019
Ending Inventory P9,000 understated P15,000 overstated
Depreciatio.n
21,000 overstated 2,000 understated
Expense
Accrued Expenses 2,500 overstated 17,500 understated
Prepaid Expenses 2,000 understated 24,000 understated
Accrued Revenues 3,000 overstated
Deferred Revenues 2,100 understated

1. What is the total effect of the errors on the company’s working capital at December
31, 2018?
2. What is the total effect of the errors on the 2018 net income?
3. What is the total effect of the errors on the company’s working capital at December
31, 2019?
4. What is the total effect of the errors on the 2019 net income?
5. What is the total effect of the errors on the balance of the company’s retained
earnings at December 31, 2019?

Problem 2
PROBLEM NO. 2

The following accounts were included in the unadjusted trial balance of BUNCHING
COMPANY as of December 31, 2017:

Cash.............................................................................................. P 963,200
Accounts receivable .......................................................................2,254,000
 Inventory ........................................................................................6,050,000
Accounts payable ...........................................................................4,201,000
Accrued expenses..............................................................................431,000

During your audit, you noted that Bunching Company held its cash books open after
year-end. In addition, your audit revealed the following:

1. Receipts for January 2018 of P654,600 were recorded in the December 2017 cash
receipts book. The receipts of P360,100 represent cash sales and P294,500
represent collections from customers, net of 5% cash discounts.

2. Accounts payable of P372,400 was paid in January 2018. The payments, on

which discounts of P12,400 were taken, were included in the December 2017
check register.

3. Merchandise inventory is valued at P6,050,000 prior to any adjustments. The

following information has been found relating to certain inventory transactions:

a. The invoice for goods costing P175,000 was received and recorded as a
purchase on December 31, 2017. The related goods, shipped FOB destination,
were received on January 4, 2018, and thus were not included in the physical
inventory.

b. A P182,000 shipment of goods to a customer on December 30, 2017, terms

FOB destination, are not included in the year-end inventory. The goods cost
P130,000 and were delivered to the customer on January 3, 2018. The sale
was properly recorded in 2018.

c. Goods costing P637,500 were shipped on December 31, 2017, and were
delivered to the customer on January 3, 2018. The terms of the invoice were
FOB shipping point. The goods were included in the 2017 ending inventory
even though the sale was recorded in 2017.

d. Goods costing P217,500 were received from a vendor on January 4, 2018.

The related invoice was received and recorded on January 6, 2018. The goods
were shipped on December 31, 2017, terms FOB shipping point.
 e. Goods valued at P275,000 are on consignment with a customer. These goods
are not included in the inventory figure.

f. Goods valued at P612,800 are on consignment from a vendor. These goods

are not included in the physical inventory.

Determine the adjusted balances of the following on December 31, 2017:

6. Cash
7. Accounts receivable
8. Inventory
9. Accounts payable
10. Current ratio

Problem 3

The following are two (2) unrelated situations.

1. The December 31 year-end financial statements of SAMOA COMPANY

contained the following errors:
Dec. 31, 2016 Dec. 31, 2017
Ending inventory P48,000 understated P40,500 overstated
Depreciation expense P11,500 understated -------

An insurance premium of P330,000 was prepaid in 2016 covering the years 2016,
2017, and 2018. The entire amount was charged to expense in 2016. In addition, on
December 31, 2017, a fully depreciated machinery was sold for P75,000 cash, but the
sale was not recorded until 2018. There were no other errors during 2016 and 2017,
and no corrections have been made for any of the errors. Ignore income tax effects.

11. What is the total effect of the errors on Samoa’s 2016 net income?
12. What is the total effect of the errors on the amount of Samoa’s working capital at
December 31, 2017?
13. What is the total effect of the errors on the balance of Samoa’s retained earnings
at December 31, 2017?

2. CHILE CO. reported pretax incomes of P505,000 and P387,000 for the years
ended December 31, 2016 and 2017, respectively. However, the auditor noted that
the following errors had been made:

a. Sales for 2016 included amounts of P191,000 which had been received in cash
during 2016, but for which the related goods were shipped in 2017. Title did not
pass to the buyer until 2017.

b. The inventory on December 31, 2016 was understated by P43,200.

c. The company’s accountant, in recording interest expense for both 2016 and 2017
on bonds payable, made the following entry on an annual basis:
Interest expense 75,000
Cash 75,000

The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%.
They were issued at a discount of P75,000 on January 1, 2016, to yield an
effective 7% rate.

d. Ordinary repairs to equipment had been erroneously charged to the Equipment

account during 2016 and 2017. Repairs of P42,500 and P47,000 had been
incurred in 2016 and 2017, respectively. In determining depreciation charges,
Chile applies a rate of 10% to the balance in the Equipment account at the end of
the year.

14. What is the corrected pretax income for 2016?

15. What is the corrected pretax income for 2017?