Exercises.

Accounting for Correction of Errors

1. On November 1, 2021, Bonsay Company paid P10,800 to renew its insurance policy for 3 years. On
December 31, 2021, Bonsay’s unadjusted trial valance showed a balance of P270 for prepaid insurance
and P13,230 for insurance expense. What amounts should be reported for prepaid insurance and
insurance expense in Bonsay’s December 31, 2021 financial statements?

Prepaid Insurance Insurance Expense

a. P 9,900 P 3,600
b. P 10,200 P 3,600
c. P 10,200 P 3,300
d. P 10,200 P 3,030

2. An analysis of Palmes Corporation’s unadjusted prepaid expense account at December 31, 2021
revealed the following:
• An opening balance at P6,000 for Palmes comprehensive insurance policy. Palmes
had paid an annual premium of P12,000 on July 1, 2020.
• A P12,800 annual insurance premium payment made July 1, 2021.
• A P8,000 advance rental payment for a warehouse Palmes leased for 1 year
beginning January 1, 2021.
In its December 31, 2021 balance sheet, what amount should Palmes report as prepaid expenses?
a. P 20,400 b. P 14,400 c. P 8,000 d. P 6,400
3. On October 1, 2021, a company sold services to a customer and accepted a note in exchange with a
P120,000 face value and an interest rate of 10%. The note requires that both the principal and interest be
paid at the maturity date, December 1, 2022. The company’s accounting period is the calendar year. What
adjusting entry (related to this note) will be required at December 31, 2021 on the company’s books?

a. Deferred interest income 3,000

Interest receivable 3,000
b. Interest income 3,000
Interest receivable 3,000
c. Interest receivable 3,000
Deferred interest income 3,000
d. Interest receivable 3,000
Interest income 3,000

4. What is the purpose of the following entry?

Supplies xxxx
Supplies expense xxxx

a. To recognize supplies used, if purchases of supplies are recorded in supplies.

b. To recognize supplies on hand, if purchases of supplies are recorded in supplies expense.
c. To record the purchase of supplies during or at the end of the period.
d. To close the expense account for supplies at the end of the period.
5. On December 31, earned but unpaid wages amounted to P15,000. What reversing entry could be made
on January 1?

a. Wages expense 15,000

Wages payable 15,000
b. Prepaid expense 15,000
Wages expense 15,000
c. Wages expense 15,000
Prepaid wages 15,000
d. Wages payable 15,000
Wages expense 15,000

6. A 3-year insurance policy was purchased on October 1 for P6,000.00 and prepaid insurance was debited.
Assuming at December 31 year-end, what is the reversing entry at the beginning of the next period?

a. None is required.
b. Cash 6,000
Prepaid insurance 6,000
c. Prepaid insurance 5,500
Insurance expense 5,500
d. Insurance expense 500
Prepaid insurance 500

7. A consulting firm started and completed a project for a client in December 2021. The project has not
been recorded on the consulting firm’s books, and the firm will not receive payment from the client until
February 2022. The adjusting entry that should be made on the books of the consulting firm on December
31, 2021, the last day of the firm’s fiscal year, is

a. Cash in transit xxx

Consulting revenue xxx
b. Consulting revenue receivable xxx
Consulting revenue xxx
c. Unearned consulting rev. xxx
Consulting revenue xxx
d. Consulting revenue receivable xxx
Unearned consulting revenue xxx

8. Nilda Company sublet a portion of its warehouse for 5 years at an annual rental of P15,000, beginning
on March 1. The tenant paid 1 year’s rent in advance, which Nilda recorded as a credit to Rental Income.
The adjustment on December 31 of the first year should be
a. No Entry.
b. Unearned rental income 2,500
Rental income 2,500
c. Rental income 2,500
Unearned rental income 2,500
d. Unearned rental income 12,500
Rental income 12,500
9. After a successful drive aimed at members of a specific national association, Micasan Company received
a total of P180,000 for 3-year subscriptions beginning April 1, 2021, and recorded this amount in the
unearned revenue account. Assuming Micasan records adjustment only at the end of the calendar year,
the adjusting entry required to reflect the proper balances in the accounts at December 31, 2021 is to

a. Debit subscription revenue for P135,000 and credit unearned revenue for P135,000.
b. Debit unearned revenue for P135,000 and credit subscription revenue for P135,000.
c. Debit subscription revenue for P45,000 and credit unearned revenue for P45,000.
d. Debit unearned revenue for P45,000 and credit subscription revenue for P45,000.

10. Salome Corporation renewed an insurance policy for 3-years beginning July 1, 2021 and recorded the
P81,000 premium in the prepaid insurance accounts. The P81,000 premium represents an increase of
P23,400 from the P57,600 premium charged 3 years ago. Assuming Salome, records its insurance
adjustments only at the end of the calendar year, the adjusting entry required to reflect the proper
balances in the insurance accounts at December 31, 2021, Salome’s year-end is to

a. Debit insurance expense for P13,500 and credit prepaid insurance for P13,500.
b. Debit prepaid insurance for P13,500 and credit insurance expense for P13,500.
c. Debit insurance expense for P67,500 and credit prepaid insurance for P67,500.
d. Debit insurance expense for P23,100 and credit prepaid insurance for P23,100.

11. Edcelle Company reported a retained earnings balance of P400,000 at December 31, 2020. In August
2021, Edcelle determined that insurance premiums of P60,000 for the 3-year period beginning January 1,
2020 had been paid and fully expensed in 2020. Edcelle has a 30% income tax rate.

What amount should Edcelle report as adjusted beginning retained earnings in its 2021
statement of retained earnings?

a. P 442,000 b. P 440,000 c. P 428,000 d. P 420,000

12.Colasissi Corporation failed to accrue warranty costs of P50,000 in its December 31,
2020 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2021 resulted in a cumulative effect of P30,000
on Colasissi’s retained earnings. Both the P50,000 and P30,000 are net of related
income taxes.
What amount should Colasissi report as prior period adjustments in 2021?
a. P 0 b. P 30,000 c. P 50,000 d. P 80,000

13. On December 31, 2021, Excel Corp. sold merchandise for P75,000 to Fineafle Co. The terms of the sale
were net 30, FOB shipping point. The merchandise was shipped on December 31, 2021 and arrived at
Fineafle on January 5, 2022. Because of a clerical error, the sale was not recorded until January 2022, and
the merchandise, sold at 25% markup, was included in Excel’s inventory at December 31, 2021. As a result,
Excel’s cost of goods sold for the year ended December 31, 2021 was

a. Understated by P 75,000 c. Understated by P 15,000

b. Understated by P 60,000 d. Correctly stated
14.An audit of Funny Co. for 2021, its first year of operations, detected the following errors made at
December 31, 2021:
• Failed to accrue P50,000 interest expense
• Failed to record depreciation expense on office equipment of P80,000
• Failed to amortize prepaid rent expense of P100,000
• Failed to delay recognition of prepaid advertising expense of P60,000
The net effect of these errors was to overstate net income for 2021 by

a. P 130,000 b. P 170,000 c. P 230,000 d. P 290,000

15. While preparing its 2021 financial statements, Falfact Corp. discovered computational errors in its
2020 and 2004 depreciation expense. These errors resulted in overstatement of each year’s income by
P25,000, net of income taxes. The following amounts were reported in the previously issued financial
statements:

Questions 16 and 17 are based on the following information.

An audit of Angelina Company has revealed the following four errors that have occurred but have not
been corrected:
• Inventory at December 31, 2020-P40,000, understated
• Inventory at December 31, 2021-P15,000, overstated
• Depreciation for 2020-P7,000, understated
• Accrued expenses at December 31, 2021-P10,000, understated

16. The errors cause the reported net income for the year ending December 31, 2021 to be
a. Overstated by P72,000 c. Understated by P28,000
b. Overstated by P65,000 d. Understated by P45,000

17. The errors cause the reported retained earnings at December 31, 2021 to be
a. Overstated by P65,000 c. Overstated by P25,000
b. Overstated by P32,000 d. Understated by P18,000
18.Collection of notes receivable of P50,000 plus interest of P500 was recorded as debit to cash of P50,500
and notes receivable of P50,500. This error will
a. Overstate the expenses by P500
b. Understate the liability by P500
c. Understate assets by P500 and understate revenue by P500
d. Understate revenue by P500

19. Accounts payable of P32,000 was paid and erroneously recorded as debit to accounts
payable and credit to cash for P23,000. The working capital
a. Has no effect c. Is understated by P9,000
b. Is overstated by P9,000 d. Is understated by P23,000

20. The beginning accumulated depreciation per record was P100,000. During the year, the firm sold one
of its machines recorded as follows:

Cash 270,000
Accumulated depreciation - machine 30,000
Machine 300,000
If the actual cash proceed is P300,000, the correcting entry would be:
a. Cash 300,000
Machine 300,000

b. Cash 30,000
Gain on sale of machine 30,000

c. Accumulated depreciation - machine 30,000

Gain on sale of machine 30,000

d. Cash 300,000
Machine 270,000
Gain on sale of machine 30,000

21. Based on no. 20, assume that the nominal accounts had been closed. The effect of the
error to the accounting elements, if not corrected, is
a. P30,000 understatement of the net income.
b. P30,000 understatement of asset and P30,000 understatement of net income.
c. P30,000 understatement of asset and P30,000 understatement of owner’s equity.
d. P30,000 understatement of asset and P30,000 overstatement of owner’s equity.

22. A cash purchase of P5,200 was recorded as P2,500. The error had been discovered when nominal
accounts were already closed to income summary, but not yet closed to the capital account. The
correcting entry will require a
a. P2,700 debit to accounts receivable
b. P2,700 debit to purchases
c. P2,700 credit to purchases
d. P2,700 credit to accounts payable
23. Under the periodic inventory system, the ending inventory of P65,000 was erroneously recorded as
P56,000. The error had been discovered when all nominal and temporary accounts were already closed
to the real account. The correcting entry would require a
a. Debit to capital account c. Credit to cost of sale
b. Debit to income summary account d. Credit to owner’s capital

24. A cash collection of P5,000 from customer’s open account was recorded as P500. The error had been
discovered when nominal accounts were still open. The correcting entry would require a
a. P4,500 debit to accounts receivable c. P500 credit to accounts receivable
b. P4,500 debit to cash d. P500 credit to cash

Problem 1
You have been assigned to examine the financial statements of Natural Company for the year ended
December 31, 2021. Below is the Balance Sheet of the company.
Current assets 700,000 Current liabilities 250,000
Non-current assets 2,000,000 Non-current liabilities 900,000
Stockholders’ Equity 1,550,000
Total Assets 2,700,000 Total liabilities/SHE 2,700,000

In the course of your audit, you discover the following situations:

1. Depreciation of P16,000 for 2021 on delivery vehicles was not recorded.

2. The physical inventory count on December 31, 2020, improperly excluded merchandise costing
P95,000 that had been temporarily stored in a public warehouse. Natural uses periodic inventory
system.

3. The physical inventory count on December 31, 2021, improperly included merchandise with a cost
of P42,500 that had been recorded as a sale on December 27, 2021.

4. A collection of P28,000 on account from a customer received on December 31, 2021 was not
recorded until January 2, 2007.

5. In 2021, the company sold for P18,500 fully depreciated equipment that originally cost P110,000.
The company credited the proceeds from the sale to the Equipment account.

6. During November 2021, a competitor company filed a patent-infringement suit against Natural
claiming damages of P1,100,000. The company’s legal counsel has indicated that an unfavorable
verdict is probable and a reasonable estimate of the court’s award to the competitor is P625,000.
The company has not reflected or disclosed this situation in the financial statements.

7. Natural has a portfolio of trading securities. No entry has been made to adjust to market.
Information on cost and market value is as follows:

COST MARKET
December 31, 2020 P190,000 P190,000
December 31, 2021 P168,000 P164,000
 8. At December 31, 2021, an analysis of payroll information shows accrued salaries of P36,600. The
Accrued Salaries payable account had a balance of P48,000 at December 31, 2021, which was
unchanged from its balance at December 31, 2020.

9. A large piece of equipment was purchased on January 3, 2021, for P1,600,000 and was charged to
Repairs Expense. The equipment is estimated to have a service life of 8 years and no residual
value. Natural normally uses the straight – line depreciation method for this type of equipment.

10. A P75,000 insurance premium paid on July 1, 2020, for a policy that expires on June 30,
2009, was charged to insurance expense.

11. A trademark was acquired at the beginning of 2020 for P250,000. No amortization has been
recorded since its acquisition. Trademark has an economic life of 5 years.

Questions
1. Current assets at year-end is:
a. P 776,000 b. P 695,000 c. P 691,000 d. P 678,500

2. Non-current assets at year-end is:

a. P 3,498,500 b. P 3,402,500 c. P 3,302,500 d. P 3,298,500

3. Current liabilities at year-end is:

a. P 911,600 b. P 863,600 c. P 286,600 d. P 238,600

4. Non-current liabilities at year-end is:

a. P 1,561,600 b. P 1,525,000 c. P 1,513,600 d. P 900,000

5. The net income of 2021 is understated by:

a. P 622,400 b. P 603,900 c. P 568,400 d. P 559,900

6. The total amount of fundamental error is:

a. P 176,000 b. P 157,500 c. P 107,500 d. P 25,000

7. Total Stockholders’ Equity at year-end is:

a. P 2,329,900 b. P 2,229,900 c. P 2,227,400 d. P 2,099,400

8. The correcting entry of item “3” assuming the company’s books were already closed is:
a. No adjustment

b. Retained earnings 42,500

Cost of sales 42,500
c. Cost of sales 42,500
Retained earnings 42,500
d. Retained Earnings 42,500
Inventory 42,500