AUDITING PROBLEMS

AP_01: CORRECTION OF ERRORS

PROBLEM 1
1) Sir Benzington failed to recognized accruals and prepayments during its first year of operations. The pre-tax earnings,
accruals and prepayments at the end of the year were:
Pre-tax profit 5,000,000
Items not recognized at year-end were as follows:
Prepaid insurance 200,000
Accrued wages 250,000
Rent revenue collected in advance 300,000
Interest receivable 100,000
The correct amount of pre-tax profit should be
A. 5,250,000 B. 5,000,000 C. 4,950,000 D. 4,750,000

ANSWER: D
Pre-tax profit 5,000,000
Items not recognized at year-end were as follows:
Prepaid insurance 200,000
Accrued wages (250,000)
Rent revenue collected in advance (300,000)
Interest receivable 100,000
Adjusted net profit 4,750,000

PROBLEM 2
The Meow Company was organized on January 1, 2020, and since its inception has not recognized accruals and deferrals.
Accruals and Deferrals Not Recognized at Year-end 2020 2021 2022
Prepaid expenses 29,000 30,000 34,000
Unearned revenue 20,000 28,000 15,000
Accrued expenses 27,500 25,000 27,000
Accrued revenue 42,500 45,000 41,000
Meow Company reported the following profit (loss): 2020 2021 2022
Profit (Loss) 240,000 (120,000) 200,000
2) What is the corrected profit for the year 2020?
A. 319,000 B. 264,000 C. 216,000 D. 246,000
3) What is the corrected loss for the year 2021?
A. 98,000 B. 122,000 C. 118,000 D. 127,000
4) What is the corrected profit for the year 2022?
A. 233,000 B. 211,000 C. 222,000 D. 244,000

ANSWER: B, B, B
2020 2021 2022
Unadjusted net income 240,000 (120,000) 200,000
Omission of prepaid expense 2020 29,000 (29,000)
Omission of prepaid expense 2021 30,000 (30,000)
Omission of prepaid expense 2022 34,000
Omission of unearned revenue 2020 (20,000) 20,000
Omission of unearned revenue 2021 (28,000) 28,000
Omission of unearned revenue 2022 (15,000)
Omission of accrued expense 2020 (27,500) 27,500
Omission of accrued expense 2021 (25,000) 25,000
Omission of accrued expense 2022 (27,000)
Omission of accrued expense 2020 42,500 (42,500)
Omission of accrued expense 2021 45,000 (45,000)
Omission of accrued expense 2022 41,000
Adjusted net income 264,000 122,000 211,000



PROBLEM 3
Havana Brown Company reported the following net income figures without knowledge of inventory errors.
Year Reported Net Income Error in Ending Inventory
2019 500,000 Overstated 50,000
2020 520,000 Overstated 90,000
2021 540,000 Understated 110,000
2022 560,000 No error
2023 580,000 Understated 20,000
2024 600,000 Overstated 100,000

Questions: Based on the above and the result of your audit, compute the corrected profit for the following year:
5) 2019
A. 550,000 B. 450,000 C. 360,000 D. 500,000
6) 2020
A. 480,000 B. 570,000 C. 560,000 D. 430,000
7) 2021
A. 740,000 B. 650,000 C. 630,000 D. 560,000
8) 2022
A. 670,000 B. 650,000 C. 470,000 D. 450,000
9) 2023
A. 600,000 B. 580,000 C. 560,000 D. 500,000
10) 2024
A. 580,000 B. 520,000 C. 500,000 D. 480,000

ANSWER: B, A, A, D, A, D
2019 2020 2021 2022 2023 2024
Unadjusted 500,000 520,000 540,000 560,000 580,000 600,000
2019 error (50,000) 50,000
2020 error (90,000) 90,000
2021 error 110,000 (110,000)
2022 error
2023 error 20,000 (20,000)
2024 error (100,000)
Adjusted 450,000 480,000 740,000 450,000 600,000 480,000

AP_01: CORRECTION OF ERRORS •PAGE 2/15•
PROBLEM 4
You have been engaged to audit the accounts of Drum Company for the first time in 2024. During the audit you discovered
the following information.
2023 2024
The following were omitted at each year-end:
Salaries payable 12,000 5,000
Accrued interest income 4,000 3,000
Unearned rental income 14,000 15,000
Prepaid insurance 3,000 5,000
Collections from customers at year-end, recorded as sales but deliveries were not made until the 31,000 25,000
following year.
Payment to suppliers at year end, recorded as purchases but merchandise were not received until 10,000 7,000
the following year.
Routinary repairs cost charged to equipment account at the beginning of each year. Depreciation 60,000 80,000
rate on fixed asset was at 20%.
Unadjusted net income 245,000 310,000
11) What is the adjusted net income for 2023?
A. 157,000 B. 133,000 C. 123,000 D. 93,000
12) What is the adjusted net income for 2024?
A. 268,000 B. 204,000 C. 205,300 D. 193,700
13) What is the retroactive adjustment to the retained earnings at the beginning of 2024?
A. 88,000 debit B. 88,000 credit C. 102,000 debit D. 64,000 credit

ANSWER: A, A, A
2023 2024
Unadjusted 245,000 310,000
Omission of salaries payable 2023 (12,000) 12,000
Omission of salaries payable 2024 (5,000)
Omission of accrued interest income 2023 4,000 (4,000)
Omission of accrued interest income 2024 3,000
Omission of unearned rental income 2023 (14,000) 14,000
Omission of unearned rental income 2024 (15,000)
Omission of prepaid insurance 2023 3,000 (3,000)
Omission of prepaid insurance 2024 5,000
Overstatement of sales 2023 (31,000) 31,000
Overstatement of sales 2024 (25,000)
Overstatement of purchases 2023 10,000 (10,000)
Overstatement of purchases 2024 7,000
Understatement of repair expense (60,000) (80,000)
Overstatement of depreciation 2023 (60,000 x 20%) 12,000
Overstatement of depreciation 2024 (60,000 x 20%) + (80,000 x 20%) 28,000
Adjusted net income 157,000 268,000

Net income 2023 unadjusted 245,000

Net income 2023 adjusted 157,000
Overstatement of net income closed to retained earnings 88,000

AP_01: CORRECTION OF ERRORS •PAGE 3/15•


PROBLEM 5
You were engaged by Panic 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 2021 and 2022. You also discovered that other items had been
improperly recorded. These omissions and other errors for each year were summarized:
December 31, 2022 December 31, 2021
Salaries payable 780,000 873,600
Interest receivable 213,000 259,200
Prepaid insurance 307,800 384,000
Advances from customers 561,000 470,400
(collection 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 522,000 564,000
(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%)
Questions: Considering the above date and the result of the audit, answer the following:
14) What is the total effect of the errors on the 2021 net income?
A. Understated by P1,236,600 C. Overstated by P80,400
B. Understated by P775,800 D. Overstated by P165,000
15) What is the total effect of the errors on the 2022 net income?
A. Understated by P320,100 C. Overstated by P324,300
B. Understated by P376,500 D. Overstated by P380,700
16) What is the total effect of the errors on the company’s working capital at December 31, 2022?
A. Understated by P265,800 C. Overstated by P820,200
B. Understated by P301,800 D. Overstated by P119,400
17) What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2022?
A. Overstated by P885,900 C. Understated by P155,100
B. Overstated by P930,900 D. Understated by P265,800
18) The necessary adjusting journal entry for the error in the recording capital expenditures on Machinery as of December
31, 2021 would include:
A. A credit to retained earnings of P535,800 C. A debit to depreciation expense of P54,300
B. A credit to accumulated depreciation of P82,500 D. A debit to machinery of P522,000

ANSWER: D, A, C, C, A
2021 2022
Unadjusted -- --
Omission of salaries payable 2021 (873,600) 873,600
Omission of salaries payable 2022 (780,000)
Omission of interest receivable 2021 259,200 (259,200)
Omission of interest receivable 2022 213,000
Omission of prepaid insurance 2021 384,000 (384,000)
Omission of prepaid insurance 2022 307,800
Overstatement of sales 2021 (470,400) 470,400
Overstatement of sales 2022 (561,000)
Overstatement of repair expense 2021 564,000
Overstatement of repair expense 2022 522,000
Understatement of depreciation 2021 (564,000 x 5%) (28,200)
Understatement of depreciation 2022 (564,000 x 10%) + (522,000 x 5%) . (82,500)
Net adjustment (165,000) 320,100

understatement of salaries payable 2022 (780,000)
understatement of interest receivable 2022 213,000
understatement of prepaid insurance 2022 307,800
overstatement of sales 2022 (561,000)
Net 820,200

Net adjustment 2021 (165,000)
Net adjustment 2022 320,100


AP_01: CORRECTION OF ERRORS •PAGE 4/15•
Net 155,100

PROBLEM 6
In line with your audit with Inozent One, Inc. financial statements, the company accountant presented to you the balance
sheet that follows. You reviewed the client’s accounting records and books based thereon. You discovered that books of
accounts are in agreement in the said balance sheet as presented below:
INOZENT ONE, INC.
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2022
Asset Liabilities and Shareholder’s Equity
Cash 80,000 Accounts payable 32,000
Accounts receivable 160,000 Notes payable 64,000
Notes receivable 48,000 Capital stock 160,000
Inventories 400,000 Retained earnings 432,000
Total 688,000 Total 688,000
Audit notes:
a. Further review and investigation of the company’s books revealed the following omissions and errors which were not
corrected during the year of errors:
2019 2020 2021 2022
Deferred expense 14,400 11,200 8,000 9,600
Deferred income 6,400 4,800
Accrued expense 3,200 1,200 1,600 800
Accrued income 2,000 2,400
Ending inventory – overstated 112,000 128,000
Ending inventory – understated 96,000 144,000
b. A P50,000 routinary repair cost incurred on its equipment at the beginning of 2019 was charged to the equipment
account and was depreciated using straight-line method over the remaining useful life of the equipment which was 5
years

c. A P90,000 major repair cost which enhanced the production capacity of one of its equipment at the beginning of 2021
was charged to repairs expense. Remaining useful life of the related production equipment was 3 years.

No dividends were declared during the year 2019 to 2022 and no adjustments were made to retained earnings. The
company’s reported the following net income:
Year 2019 2020 2021 2022
Net income 120,000 88,000 104,000 120,000
Questions: Considering the above date and the result of the audit, answer the following: (DISREGARD TAX)
19) What is the correct net income (loss) in 2019?
A. 35,200 B. 198,400 C. 187,200 D. 227,200
20) What is the correct net income (loss) in 2020?
A. 290,400 B. (29,600) C. (115,600) D. (125,600)
21) What is the correct net income (loss) in 2021?
A. 88,800 B. 158,800 C. 89,600 D. 120,800
22) What is the correct net income (loss) in 2022?
A. 372,000 B. 392,000 C. 390,400 D. (152,000)
23) What is the net adjustment to retained earnings as of January 1, 2022?
A. 81,600 debit B. 120,000 credit C. 121,600 debit D. 121,600 credit
24) What is the net adjustment to working capital as of December 31, 2022?
A. 144,000 B. 150,400 C. 154,500 D. 163,200

AP_01: CORRECTION OF ERRORS •PAGE 5/15•
ANSWER: C, C, B, A, A, B
Year 2019 2020 2021 2022
Unadjusted 120,000 88,000 104,000 120,000
Omission of deferred expense 14,400 (14,400)
11,200 (11,200)
8,000 (8,000)
9,600
Omission of deferred income (6,400) 6,400
(4,800)
Omission of accrued expense (3,200) 3,200
(1,200) 1,200
(1,600) 1,600
(800)
Omission of accrued income 2,000 (2,000)
2,400
Error on inventory (112,000) 112,000
(128,000) 128,000
96,000 (96,000)
144,000
Understatement of repair (50,000)
Overstatement of depreciation 10,000 10,000 10,000 10,000
Overstatement of repair 90,000
Understatement of depreciation (30,000) (30,000)
Adjusted net income 187,200 (115,600) 158,800 372,000

Year 2019 2020 2021 Total

Unadjusted 120,000 88,000 104,000 312,000
Adjusted net income 187,200 (115,600) 158,800 230,400
Net RE adjustment 81,600

Year 2022
Deferred expense 9,600
Deferred income (4,800)
Accrued expense (800)
Accrued income 2,400
Inventory 144,000
Net 150,400

PROBLEM 7
You audited the financial statements of PIS Corp. for the first time in 2022. The company started its operation in early 2020.
Upon investigation, you discovered the following information:

a. The company reported the net income at P104,000, P140,000 and P160,000 in 2020, 2021, and 2022, respectively.

b. The company consistently omitted the following:

2020 2021 2022
Prepaid insurance 2,000 4,000 6,000
Accrued salaries 7,500 6,200 8,300
Unearned rent 5,000 6,000 7,000
c. Deliveries of merchandise to customers at December 31 of each year end were recorded as sales upon collection the
following year. The corresponding sales price of the said deliveries were P15,000, P12,000 and P14,000 in 2020,
2021, and 2022, respectively. Inventory counts were conducted on December 31 of each year before any deliveries
and receipts were made on the said date. Sales were made consistently at a gross profit rate of 40% of sales.
d. Purchases in transit FOB destination at each year end amounted to P5,000 and P7,000 in 2021 and 2022
respectively. These were recorded as purchases upon receipt of the corresponding invoices in December. The in-
transit inventories were properly excluded from the inventory balances at year-end.
e. The company incurred pre-operating and organization costs totaling P80,000 in early 2020 which it had capitalized as
intangible asset and amortized over 5 years.

AP_01: CORRECTION OF ERRORS •PAGE 6/15•
f. Improvements were made and completed early in 2020 on the leased office space costing P100,000 which it had
capitalized to a leasehold improvements account and had depreciated over its life which was 10 years. The term of the
non-cancellable lease however is 5 years without renewal option.

Questions: Considering the above data and the result of the audit, determine the following:
25) What is the correct net income in 2020?
A. 44,500 B. 34,500 C. 35,500 D. 25,500
26) What is the retroactive adjustment to the 2022 beginning retained earnings?
A. (68,200) B. (66,400) C. (59,200) D. (49,200)
27) What is the correct net income in 2022?
A. 170,500 B. 149,100 C. 144,500 D. 167,700
28) What is the effect of the errors to the 2021 working capital?
A. (3,400) B. (13,600) C. 8,800 D. 1,600
29) If the errors remained uncorrected by the end of 2022, the effect of the errors to the 2022 ending retained earnings is
A. 58,700 overstated B. 74,700 overstated C. 50,700 overstated D. 52,500 overstated

ANSWER: D, B, D, D, A
Year 2020 2021 2022
Unadjusted 104,000 140,000 160,000
b. Omission of prepaid insurance 2,000 (2,000)
4,000 (4,000)
6,000
Accrued salaries (7,500) 7,500
(6,200) 6,200
(8,300)
Unearned rent (5,000) 5,000
(6,000) 6,000
(7,000)
c. Understatement of sales 15,000 (15,000)
12,000 (12,000)
14,000
Understatement of cost of sales (9,000) 9,000
(7,200) 7,200
(8,400)
d. Overstatement of purchases 5,000 (5,000)
7,000
e. Understatement of expense (org cost) (80,000)
Overstatement of amortization expense 16,000 16,000 16,000
f. Understatement of depre. of lease imp. (10,000) (10,000) (10,000)
Adjusted 25,500 152,100 167,700

Year 2020 2021 Total

Unadjusted 104,000 140,000 244,000
Adjusted 25,500 152,100 177,600
66,400

Year 2020 2021 2022 Total

Unadjusted 104,000 140,000 160,000 404,000
Adjusted 25,500 152,100 167,700 345,300
58,700

AP_01: CORRECTION OF ERRORS •PAGE 7/15•
PROBLEM 8
You have been engaged to examine the financial statements of Tupac Corporation for the year 2023. The bookkeeper who
maintains the financial records has prepared all of the unadjusted financial statements for the Corporation since its
organization on January 2, 2021. You discover numerous errors that have been made in these statements. The client has
asked you to compute the correct income for the three years 2021 through 2023 and to prepare a corrected balance sheet
as of December 31, 2023. In the course of your examination you discover the following:

a. The Corporation includes sales taxes collected form customers in the Sales account. When sales tax collections for a
month are remitted to the taxing authority on the 15th of the following month, the Sales Tax Expense account is
charged. All sales are subjected to a 3% sales tax. Total sales plus sales taxes for 2021 through 2023 were P495,430,
P762,200 and P875,500, respectively. The totals of the Sales Tax Expense account for the three year were P12,300,
P21,780 and P26,640.

b. Furniture and fixtures were purchased on January 2, 2021 for P12,000 but no portion of the cost has been charted to
depreciation. The Corporation wishes to use the straight-line method for these assets which have been estimated to
have a life of 10 years and no salvage value.

c. In January 2021 installation costs of P5,700 on new machinery were charged to Repairs Expense. Other costs of this
machinery of P30,000 were correctly recorded and have been depreciated using the straight-line method with an
estimated life of 10 years and no salvage value.

d. An account payable of P8,000 for merchandise purchased on December 23, 2021 was recorded in January 2022. This
merchandise was not included in inventory at December 31, 2021.

e. Merchandise having a cost of P6,550 was stored in a separate warehouse and was not included in the December 31,
2022 inventory, and merchandise having a cost of P2,180 was included twice in the December 31, 2023 inventory. The
Corporation uses a periodic inventory method.

f. The year-end salary accrual of P1,925 on December 31, 2023 has not been recorded.

g. A check for P1,895 from a customer to apply to this account was received on December 31, 2021 but was not
recorded until January 2, 2022.

h. The Corporation has used the direct write-off method of accounting for bad debts. Accounts written off during each of
the three years amount to P1,745, P2,200 and P5,625, respectively. The Corporation has decided that the Allowance
for Doubtful Accounts at the end of each of the three years are: P6,100, P8,350 and P9,150.

Assume that the net income computed before all adjustments and corrections was P180,000 for 2021, P212,000 for 2022
and P252,000 for 2023.

Questions:
30) What is the adjusted net income in 2021?
A. 175,700 B. 181,800 C. 163,400 D. 176,270
31) What is the adjusted net income in 2022?
A. 214,110 B. 208,010 C. 216,240 D. 201,010
32) What is the adjusted net income in 2023?
A. 237,635 B. 240,335 C. 240,715 D. 239,915
33) What is the net effect of these errors on total assets as of December 31, 2023?
A. 10,940 over B. 7,360 under C. 9750 over D. 4,390 over
34) What is the net effect of these errors on the total shareholders’ equity as of December 31, 2023?
A. 4,025 under B. 7,725 over C. 14,275 over D. 13,085 over













AP_01: CORRECTION OF ERRORS •PAGE 8/15•
ANSWER: A, A, D, A, C
Year 2021 2022 2023
Unadjusted 180,000 212,000 252,000
a. Overstatement of sales (14,430) (22,200) (25,500)
Overstatement of expense 12,300 21,780 26,640
b. Understatement of depreciation (1,200) (1,200) (1,200)
c. Overstatement of repairs expense 5,700
Understatement of depreciation (570) (570) (570)
d. Understatement of purchase (8,000) 8,000
Understatement of ending inventory 8,000 (8,000)
e. Understatement of inventory 2022 6,550 (6,550)
Overstatement of inventory 2023 (2,180)
f. Omission of salary payable (1,925)
g. No effect on income
h. To reverse the effect of direct write off 1,745 2,200 5,625
To record bad debt expense using allow. (7,845) (4,450) (6,425)
Adjusted 175,700 214,110 239,915
6,100 + 1,745 – 0 =
8,350 + 2,200 – 6,100 = 4,450
9,150 + 5,625 – 8,350 = 6,425

Year 2021 2022 2023 Total

Unadjusted 180,000 212,000 252,000 644,000
Adjusted 175,700 214,110 239,915 629,725
Net adjustment over/under 14,275

Overstatement of SHE 14,275

Understatement of salary payable (f) 1,925
Understatement of tax payable (62,130 – 60,720) 1,410
Total 10,940

AP_01: CORRECTION OF ERRORS •PAGE 9/15•
PROBLEM 9
You are auditing for the first time, the Financial Statements of Frostwolf Inc. for the period ended December 31, 2022. In the
course of your audit, you discovered the following:

a. The following items were consistently omitted for each year:

2019 2020 2021 2022
Prepayments 25,000 22,000 27,000 26,000
Accrued expenses 30,000 35,000 32,000 34,000
Unearned income 10,000 12,000 13,000 15,000
Accrued income 20,000 18,000 16,000 19,000
b. Deliveries of merchandise to customers on December 31 of each year, were recorded as sales upon collection the
following year:
Year 2020 2021 2022
Selling Price 126,000 147,000 133,000
The physical count of inventories was done to all merchandise on hand as of December 31 (before any deliveries) of
each year. Goods were priced to sell at 40% mark-up based on cost.

c. Organization cost amounting to P400,000 at the beginning of 2019 was capitalized and amortized over 5 years starting
2019.

d. The company received a building as a donation from the city government on April 30, 2020 with the condition that the
company shall use the building as a manufacturing plant for 20 years employing local personnel from the area. The fair
value of the said asset was P3,000,000 by the time of the donation. The company incurred P500,000 in remodeling
cost bringing the asset to a useful condition by July 1, 2020. The company is yet to recognize the building donated and
has simply charged to 2020 expense the remodeling cost.

e. The company registered the following net income from its inception of operations to the current year:
Year 2019 2020 2021 2022
Net income 2,500,000 1,850,000 2,250,000 2,700,000
Questions: Considering the above date and the result of the audit, answer the following:
35) What is the correct net income in 2021?
A. 2,166,000 B. 2,316,000 C. 2,322,000 D. 2,416,000
36) What is the correct net income in 2022?
A. 2,599,000 B. 2,649,000 C. 2,749,000 D. 2,799,000
37) What is the correct retained earnings, end of 2020?
A. 4,639,000 B. 4,614,000 C. 4,126,500 D. 4,626,500
38) What is the effect of the errors to the 2022 working capital?
A. 4,000 over B. 124,000 under C. 34,000 under D. 4,000 under
39) The retroactive adjustment to the retained earnings beginning 2022 as a result of your audit of the organization cost is
A. 240,000 debit B. 160,000 debit C. 80,000 debit D. 400,000 debit
40) The retroactive adjustment to the retained earnings beginning 2022 as a result of your audit of the government grant is
A. 37,500 debit B. 252,500 debit C. 437,500 credit D. 462,500 credit

AP_01: CORRECTION OF ERRORS •PAGE 10/15•
ANSWER: B, C, D, C, B, D
Year 2019 2020 2021 2022
Net income 2,500,000 1,850,000 2,250,000 2,700,000
a. Omission of prepayment 35,000 (35,000)
22,000 (22,000)
27,000 (27,000)
26,000
Accrued expense (30,000) 30,000
(35,000) 35,000
(32,000) 32,000
(34,000)
Unearned income (10,000) 10,000
(12,000) 12,000
(13,000) 13,000
(15,000)
Accrued income 20,000 (20,000)
18,000 (18,000)
16,000 (16,000)
19,000
b. Understatement of sales 126,000 (126,000)
147,000 (147,000)
133,000
Overstatement of inventory (90,000) 90,000
(105,000) 105,000
(95,000)
c. Understatement of expense (org cost) (400,000)
Overstatement of amortization exp. 80,000 80,000 80,000 80,000
d. Overstatement of expense (remold.) 500,000
Understatement of depreciation (87,500) (175,000) (175,000)
Understatement of grant income 75,000 150,000 150,000
Adjusted 2,195,000 2,431,500 2,316,000 2,749,000

Year 2019 2020 Total

Net income 2,500,000 1,850,000 4,350,000
Adjusted 2,195,000 2,431,500 4,626,500

Prepayments 26,000
Accrued expenses (34,000)
Unearned income (15,000)
Accrued income 19,000
Understatement of AR 133,000
Overstatement of inventory (95,000)
Net working capital error 34,000

Year 2019 2020 2021 Total

Understatement of expense (org cost) (400,000) (400,000)
Overstatement of amortization exp. 80,000 80,000 80,000 240,000
Net 160,000
2019 2020 2021 Total
Overstatement of expense (remold.) 500,000 500,000
Understatement of depreciation (87,500) (175,000) (262,500)
Understatement of grant income 75,000 150,000 225,000
Net 462,500

AP_01: CORRECTION OF ERRORS •PAGE 11/15•
PROBLEM 10
You are auditing for the first time the financial statements of Doug Corporation for the period ended December 31, 2023.
Doug Corporation a manufacturer of steel bars distributed mainly to construction companies, started its operations in 2021.
Doug’s accountant presented to you the following analysis of its Retained Earnings account:
Date Particulars Debit Credit Balance
12.31.21 2021 net loss 105,000 (105,000)
12.31.22 2022 net income 550,000 445,000
01.31.23 Payment of dividends 200,000 245,000
12.31.23 2023 net income 800,000 1,045,000
Audit notes:
a. An equipment costing P200,000 was recognized as repairs and maintenance expense on July 1, 2021. It was
ascertained that the cost should have been capitalized and depreciated under straight-line over a 5-year useful life to
zero residual value.

b. The following items were omitted:

2021 2022 2023
Salaries payable 15,000 --- 21,000
Prepaid rent 35,000 24,000 12,000
c. Customer cash advances amounting to P50,000 and P35,000 were received at the end of 2022 and 2023,
respectively, and were recorded by the client as sales.

d. The following errors were also noted with regard the company’s year-end inventory summary:
2021 2022 2023
Understatement 20,000 --- ---
Overstatement --- 12,000 5,000
e. Dividends declared at the end of 2022 and 2023 were paid and recorded the following year. Dividends declared in
2023 and paid in 2024 was at P150,000.

Questions:
41) What is the adjusted net income in 2021?
A. 95,000 B. 115,000 C. 130,000 D. 145,000
42) What is the adjusted net income in 2023?
A. 432,000 B. 709,000 C. 749,000 D. 759,000
43) What is the retroactive adjustment to the retained earnings beginning of 2023?
A. 102,000 B. 138,000 C. 98,000 D. 78,000
44) What is the adjusted retained earnings on December 31, 2023?
A. 946,000 B. 1,096,000 C. 746,000 D. 896,000
45) What is the effect of the errors in the 2023 working capital?
A. 49,000 B. 99,000 C. 149,000 D. 199,000




















AP_01: CORRECTION OF ERRORS •PAGE 12/15•
ANSWER: B, C, C, A, D
Year 2021 2022 2023
Net income (105,000) 550,000 800,000
a. Overstatement of repair expense 200,000
Understatement of depreciation (20,000) (40,000) (40,000)
b. Salaries payable (15,000) 15,000
(21,000)
Prepaid rent 35,000 (35,000)
24,000 (24,000)
12,000
c. Overstatement of sales (50,000) 50,000
(35,000)
d. Inventory errors 20,000 (20,000)
(12,000) 12,000
(5,000)
Adjusted 115,000 432,000 749,000

Year Made Should be Adjustment

Net income /loss 2021 (105,000) 115,000
Net income 2022 550,000 432,000
Dividends declared 2022 - (200,000)
RE balance end of 2022 445,000 347,000 98,000

Year Should be
Net income /loss 2021 115,000
Net income 2022 432,000
Dividends declared 2022 (200,000)
Net income 2023 749,000
Dividends declared 2023 (150,000)
Correct RE balance 2023 end 946,000

Understatement of salaries payable (21,000)

Understatement of prepaid rent 12,000
Understatement of unearned rent (35,000)
Overstatement of inventory (5,000)
Understatement of dividends payable (150,000)
Total 199,000

AP_01: CORRECTION OF ERRORS •PAGE 13/15•
PROBLEM 11
Eclipse Corporation reported the following amounts of net income for the years December 31, 2020, 2021 and 2022:
2020 – P190,500 2021 – P225,000 2022 – P192,750

Audit notes:
a. As a result of errors in the physical count, ending inventories were misstated as follows:
December 31, 2021 21,000 understated
December 31, 2022 34,500 overstated
b. On December 29, 2022, Eclipse recorded as a purchase, merchandise in transit which cost P22,500. The merchandise
was shipped FOB Destination and had not arrived by December 31. The merchandise was not included in the ending
inventory.
c. Eclipse records sales on accrual basis but failed to record sales on account made near the end of each year as follows:
2020 6,000
2021 7,500
2022 5,250
d. The company failed to record accrued office salaries as follows:
December 31, 2020 15,000
December 31, 2021 21,000
e. On March 5, 2021, a 10% bonus issue was declared and distributed. The par value of the shares amounted to
P15,000 and market value was P19,500. The stock dividend was recorded as follows:
Miscellaneous expense 19,500
Ordinary shares 15,000
Retained earnings 4,500
f. On July 1, 2021, Eclipse acquired a 3-year insurance policy. The 3-year premium of P9,000 was paid on that date, and
the entire premium was recorded as insurance expense.
g. On January 1, 2022, Eclipse retired bonds with a book value of P180,000 for P159,000. The gain was Eclipse
incorrectly deferred and is being amortized over 10 years as a reduction of interest expense on other outstanding
bonds.
Questions: Considering the above data and the result of the audit, determine the following:
46) What is the adjusted net income in 2020?
A. 169,500 B. 175,500 C. 181,500 D. 199,500
47) What is the adjusted net income in 2021?
A. 238,500 B. 267,000 C. 268,500 D. 280,500
48) What is the adjusted net income in 2022?
A. 156,600 B. 194,400 C. 196,500 D. 209,400
49) What adjusting entry should be made on December 31, 2022, to correct the error described in item b?
A. Accounts payable – P22,500 C. Accounts payable – P22,500
Purchases – P22,500 Cash – P22,500
B. Purchased – P22,500 D. No adjusting entry is necessary.
Accounts payable – P22,500
50) The adjusting entry on December 31, 2021, to correct the error described in item E should include a debit to
A. Share premium – P4,500 C. Ordinary share capital – P15,000
B. Retained earnings – P24,000 D. Miscellaneous expense – P4,500

J END OF HANDOUT 1: CORRECTION OF ERRORS J

AP_01: CORRECTION OF ERRORS •PAGE 14/15•
ANSWER: C, C, B, A, B
Year 2020 2021 2022
Unadjusted 190,500 225,000 192,750
a. Inventory error 21,000 (21,000)
(34,500)
b. Overstatement of purchases 22,500
c. Understatement of sales 6,000 (6,000)
7,500 (7,500)
5,250
d. Omission of salaries payable (15,000) 15,000
(21,000) 21,000
e. Overstatement of misc. expense 19,500
f. Overstatement of premium expense 9,000
Understatement of premium expense (1,500) (3,000)
g. Understatement of gain on sale 21,000
Overstatement of amort.of gain (2,100)
Adjusted 181,500 268,500 194,400

Adjusting entry for item E:

Dr. Retained Earnings 24,000
Cr. Miscellaneous Expense 19,500
Cr. Share premium 4,500

AP_01: CORRECTION OF ERRORS •PAGE 15/15•