Problem 1

The first audit of the books of Luzon Company was made for the year ended December 31,

2006. In examining the books, the auditor found that certain items had been overlooked or

incorrectly handled in the last 3 years. These items are:

a. At the beginning of 2004, the company purchased a machine for P1,020,000 (salvage

value of P102,000) that had a useful life of 6 years. The bookkeeper used straight-line

depreciation, but failed to deduct the salvage value in computing the depreciation base

for the 3 years.

b. At the end of 2005, the company failed to accrue sales salaries of P90,000.

c. A tax lawsuit that involved the year 2004 was settled late in 2006. It was determined

that the company owed an additional P170,000 in taxes related to 2004. The company

did not record a liability in 2004 or 2005 because the possibility of loss was considered

remote, and charged the P170,000 to a loss account in 2006.

d. Luzon Company purchased another company early in 2004 and recorded goodwill of

P900,000. Luzon had not amortized goodwill because its value had not diminished. The

estimated economic life of the goodwill is 20 years.

e. In 2006, the company wrote off P174,000 of inventory considered to be obsolete; this

loss was charged directly to Retained Earnings.

f. Year-end wages payable of P6,800 were not recorded because the bookkeeper though

that “they were immaterial.”

g. Insurance for a 12-month period purchased on November 1 of this year was charged to

insurance expense in the amount of P5,280 because “the amount of the check is about

the same every year.

Questions

1. The entry to record the adjustment of item “a” is:

a. Accumulated depreciation 34,000

Retained earnings 17,000

Depreciation expense 17,000

b. Accumulated depreciation 51,000

Retained earnings 34,000

Depreciation expense 17,000

c. Accumulated depreciation 17,000

Depreciation expense 17,000

d. Accumulated depreciation 17,000

Retained earnings 17,000