ASSIGNMENT – ERROR CORRECTION

I.When the records of Merlitaw Merchandising Company were reviewed at the close of 2013, the
errors listed below were discovered.
1. For each item, indicate the effects of each of the following errors by writing O for
overstatement, U for understatement and X for no effect in the appropriate column.

2012 2013
Re, Re,
N Asse Liabilit RE,before after N Asse Liabilit RE,before after
I t y closing closing I t y closing closing

Failure to record purchases

of merchandise
on account of
P25,000 at the end of 2012.

Sale of merchandise on account on

December 30,2012 amounting to
P20,000
was not recorded until the customer
paid his account on january 2013.

Depreciation expense on equipment

in 2012 was overstated by P10,000.

Paid one year insurance premium of

P24,00 effective April 1,2012.
The entire amount was debited to
expense account and no adjustment
was made at the end of 2012.

On December 31,2012, the

Company acquired a parcel of land
and a building at a total cost of
P500,000. The entire amount paid
was debited to land account. A
reasonable estimate of the cost
that should have been alocated to
the building was P200,000. The
building has an estimated life
of 20 years.

Failure to record supplies on hand

at the end of 2012. The supplies
on hand amounted to P5,000.
Understatement of 2012 ending
inventory worth P24,000.

Failure to record accrued interest

on notes payable at the end of
2012.Notes payable,principal
amount P100,000;interest rate,
10%;acquired March 31,2012.
Failure to recognize unearned rent
at the end of 2012 worth P12,000.

Goods received in December 2012

were recorded as purchases when
paid in 2013. The goods were
excluded
from the 2012 ending inventory.
II.The income statement of Menand Inc. showed the following net income:
2020 P1,750,000
2021 2,000,000
An examination of the accounting records for the year ended December 31,2014 revealed that
several errors were made. The following errors were discovered:
a. Salary accrued at year end and were consistently omitted:
2020 P100,000
2021 140,000
b. The footings and extensions showed that the inventory on December 31,2020 was overstated
by P190,000.
c. Prepaid insurance of P120,000 applicable to 2022 was expensed in 2021.
d. Interest receivable of p20,000 was not recorded on December 31,2021.
e. On December 26,2021 an equipment costing P400,000 was sold for P220,000. At the date of
sale, the equipment had an accumulated depreciation of P240,000. The cash received was
recorded as miscellaneous income in 2021.
f. A building which had a fair value of P1,200,000 was accepted form the city government as a
donation on January 1.2020. The building that was estimated to be useful for another 10
years was to be used as factory site as a condition on the grant. Legal fees incurred in
relation to the donation was at P100,000 and was charged to 2020 operating expenses.
Another P200,000 was incurred to remodel and renovate the building prior to use. The
building was capitalized at P200,000 (renovation cost) and was depreciated over remaining
life using straight line.

Required:
1. Correct net income in 2020.
2. Correct net income in 2021.
3. What is the retroactive adjustment to the 2022 beginning retained earnings ?
4. What is the net effect of errors to the 2021 working capital?
5. What is the correct carrying value of the building as of December 31,2021?