COLLEGE OF BUSINESS

MANAGEMENT AND ACCOUNTANCY

COMPETENCY APPRAISAL
Auditing Practice

Adjusting Entries/Correction of Errors

PROBLEM 1
The following transactions occurred on December 31, 2021, for the Bunta Company.

1) A three-year fire insurance policy was purchased on July 1, 2021, for P15,120. The company
debited insurance expenses for the entire amount.

2) The supplies inventory on January 1, 2021 was P7,350. Supplies costing P22,150 were acquired
during the year and charged to the supplies inventory. A count on December 31, 2021 indicated
supplies on hand of P8,810.

3) Depreciation on equipment totalled P14,250 for the year.

4) Employee salaries of P21,000 for the month of December will be paid in early January 2022.

5) On November 1, 2021, the company borrowed P280,000 from a bank. The note requires principal
and interest at 12% to be paid on April 30, 2022.

6) On December 1, 2021, the company received P4,800 in cash from another company that is renting
office space in Bunta's building. The payment, representing rent for December and January, was
credited to unearned rent revenue.

Required: Prepare the necessary adjusting entries for each of the above situations. Assume that
no financial statements were prepared during the year and no adjusting entries were recorded.

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PROBLEM 2
The following trial balance was taken from the books of Susan Corporation on December 31, 2021.
Account Debit Credit
Cash P 9,000
Accounts Receivable 40,000
Notes Receivable 10,000
Allowance for Doubtful Accounts P 1,800
Inventory 44,000
Prepaid Insurance 4,800
Equipment 110,000
Accumulated Depreciation-Equipment 15,000
Accounts Payable 10,800
Common Stock 44,000
Retained Earnings 75,000
Sales Revenue 260,000
Cost of Goods Sold 126,000
Salaries and Wages Expense 50,000
Rent Expense 12,800
Totals P406,600 P406,600
At year end, the following items have not yet been recorded.

1) Insurance expired during the year, P2,000.

2) Estimated bad debts, 1% of gross sales.

3) Depreciation on equipment, 10% per year. Salvage value amounted to P5,000.

4) Interest at 6% is receivable on the note for one full year.

5) Rent paid in advance at December 31, P5,400.

6) Accrued salaries and wages at December 31, P5,800.

Required: Prepare the necessary adjusting entries.

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PROBLEM 3
The following Data relating to the balances of various accounts affected by adjusting or closing entries
appear below. (The entries which caused the changes in the balances are not given.) You are asked to
supply the missing journal entries which would logically account for the changes in the account
balances.

1) Interest receivable at 1/1/2021 was P1,000. During 2021 cash received from debtors for interest
on outstanding notes receivable amounted to P5,000. The 2021 income statement showed
interest revenue in the amount of P7,400. You are to provide the missing adjusting entry that
must have been made, assuming reversing entries are not made.

2) Unearned rent at 1/1/2021 was P5,300 and at 12/31/2021 was P8,000. The records indicate
cash receipts from rental sources during 2021 amounted to P55,000, all of which was credited
to the Unearned Rent Revenue Account. You are to prepare the missing adjusting entry.

3) Accumulated depreciation—equipment at 1/1/2021 was P230,000. At 12/31/2021 the

balance of the account was P290,000. During 2021, one piece of equipment was sold for P11,000.
The equipment had an original cost of P40,000 and was 3/4 depreciated when sold. You are to
prepare the missing adjusting entry.

4) Allowance for doubtful accounts on 1/1/2021 was P50,000. The balance in the allowance
account on 12/31/2021 after making the annual adjusting entry was P65,000 and during 2021
bad debts written off amounted to P30,000. You are to provide the missing adjusting entry.

5) Prepaid rent at 1/1/2021 was P9,000. During 2021 rent payments of P120,000 were made and
charged to "rent expense." The 2021 income statement shows as a general expense the item
"rent expense" in the amount of P135,000. You are to prepare the missing adjusting entry that
must have been made, assuming reversing entries are not made.

6) Retained earnings at 1/1/2021 was P130,000 and at 12/31/2021 it was P210,000. During 2021,
cash dividends of P50,000 were paid and a stock dividend of P40,000 was issued. Both dividends
were properly charged to retained earnings. You are to provide the missing closing entry.

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 COLLEGE OF BUSINESS
MANAGEMENT AND ACCOUNTANCY
PROBLEM 4 (Counterbalancing Errors)
You discovered the following errors in connection with your audit of the financial statements of Vladimir
Corporation:

a) Accrued rent expense of P10,000 was not recorded at the end of 2020.

b) Accrued interest receivable of P15,000 was not recorded at the end of 2020.

c) The company paid one-year insurance premium of P24,000 effective April 1, 2020. The entire
amount was debited to expense account and no adjustment was made at the end of 2020.

d) The company leased a portion of its building for P48,000. The term of the lease is one year ending
April 30, 2021. Collection of rent was credited to rent revenue account. At the end of 2020, no
entry was made to take up the unearned portion of the amount collected.

The following data were extracted from the financial statements of Vladimir Corporation:

2020 2021
Net Income P100,000 P150,000
Retained Earnings 100,000 250,000
Working Capital 300,000 400,000

Based on the above data, determine the following:

1) Net income in 2020

a. 95,000
b. 90,000
c. 96,000
d. 105,000

2) Retained earnings, end of 2020

a. 95,000
b. 90,000
c. 96,000
d. 105,000

3) Working capital, end of 2020

a. 295,000
b. 300,000
c. 305,000
d. 290.000

4) Net income in 2021

a. 155,000
b. 145,000
c. 139,000
d. 161,000

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5) Retained earnings, end of 2021
a. 250,000
b. 260,000
c. 244,000
d. 235,000

6) Working capital, end of 2021

a. 406,000
b. 410,000
c. 400,000
d. 385,000

7) Prepare correcting entries assuming errors were discovered in (a) 2020, (b) 2021, and (c) 2022.

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 COLLEGE OF BUSINESS
MANAGEMENT AND ACCOUNTANCY
PROBLEM 5 (Counterbalancing Errors)
You discovered the following errors in connection with your audit of the financial statements of Gustavo
Corporation:

a) Purchase of merchandise on account on December 27, 2020 amounting to P50,000 was not
recorded until it was paid in January 2021. The merchandise was properly included in the ending
inventory in 2020.

b) Sale of merchandise on account on December 29, 2020 amounting to P70,000 was not recorded
until it was collected in January 2021. The merchandise was properly excluded in the ending
inventory in 2020.

c) On December 31, 2020, the ending inventory was understated by P20,000.

The following data were extracted from the financial statements of Gustavo Corporation:

2020 2021
Net Income P100,000 P150,000
Retained Earnings 100,000 250,000
Working Capital 300,000 400,000

Based on the above data, determine the following:

1) Net income in 2020

a. 140,000
b. 70,000
c. 50,000
d. 120,000

2) Retained earnings, end of 2020

a. 140,000
b. 70,000
c. 50,000
d. 120,000

3) Working capital, end of 2020

a. 340,000
b. 320,000
c. 390,000
d. 250.000

4) Net income in 2021

a. 110,000
b. 120,000
c. 130,000
d. 140,000

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5) Retained earnings, end of 2021
a. 250,000
b. 230,000
c. 180,000
d. 300,000

6) Working capital, end of 2021

a. 420,000
b. 400,000
c. 450,000
d. 330,000

7) Prepare correcting entries assuming errors were discovered in (a) 2020, (b) 2021, and (c) 2022.

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MANAGEMENT AND ACCOUNTANCY

PROBLEM 6 (Noncounterbalancing Errors)

You discovered the following errors in connection with your audit of the financial statements of Kabuta
Corporation:
a) The Company paid one- year insurance premium of P24,000 effective April 1, 2020. The entire
amount was debited to asset account and no adjustment was made at the end of 2020.

b) The company leased a portion of its building for P48,000. The term of the lease is one year ending
April 30, 2021. Collection of rent was credited to unearned rent revenue account. At the end of
2020, no entry was made to take up the earned portion of the amount collected.

c) Depreciation expense in 2020 was understated by P12,000.

d) Improvements on building amounting to P200,000 had been charged to expense on January 1,

2020. Improvements have a life of 5 years.

e) On January 1, 2020, an equipment costing P40,000 was sold for P20,000. At the date of sale, the
equipment had an accumulated depreciation of P15,000. The cash received was recorded as other
income in 2020.

f) Repairs expense on the building amounting to P20,000 had been charged to the building account
on January 1, 2020. Depreciation expense has been recorded in 2020 and 2021 based on the 5-
year remaining useful life of the building.
The following data were extracted from the financial statements of Kabuta Corporation:

2020 2021
Net Income P100,000 P150,000
Retained Earnings 100,000 250,000
Working Capital 300,000 400,000

Based on the above data, determine the following:

1) Net income in 2020

a. 221,000
b. 82,000
c. 70,000
d. 114,000

2) Retained earnings, end of 2020

a. 221,000
b. 70,000
c. 82,000
d. 114,000

3) Working capital, end of 2020

a. 314,000
b. 360,000
c. 332,000
d. 282,000

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4) Net income in 2021
a. 124,000
b. 160,000
c. 130,000
d. 140,000

5) Retained earnings, end of 2021

a. 250.000
b. 345,000
c. 244.000
d. 266,000

6) Working capital, end of 2021

a. 400,000
b. 424.000
c. 394,000
d. 416,000

7) Prepare correcting entries assuming errors were discovered in (a) 2020, (b) 2021, and (c) 2022.

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PROBLEM 7 (Comprehensive)
Macaroot, Inc. is a manufacturer of high-tech industrial parts that was started in 2019 by two talented
engineers with little business training. As part of an internal audit, the following facts were discovered.
The audit occurred during 2021 before any adjusting entries or closing entries were prepared.
a) A five-year casualty insurance policy was purchased at the beginning of 2019 for P35,000. The full
amount was debited to insurance expense at the time.

b) On December 31, 2020, merchandise inventory was overstated by P25,000 due to a mistake in the
physical inventory count using the periodic inventory system.

c) At the end of 2020, the company failed to accrue P15,500 of sales commissions earned by
employees during 2020. The expense was recorded when the commissions were paid in early
2021.

d) Bad debts expense is determined each year as 1% of credit sales. Actual collection experience of
recent years indicates that 0.75% is a better indication of uncollectible accounts. Management
effects the change in 2021. Credit sales for 2021 are P4,000,000; in 2020 they were P3,700,000.

e) Additional industrial robots were acquired at the beginning of 2019 and added to the company's
assembly process. The P100,000 cost of the equipment was inadvertently recorded as repair
expense. Robots have 10-year useful lives and no material salvage value. This class of equipment is
depreciated by the straight-line method.

Based on the above information, answer the following:

1) The entry to correct the error described in item a should include a
a. Credit to prepaid insurance-21,000.
b. Credit to retained earnings-21,000.
c. Debit to insurance expense-14,000
d. Credit to insurance expense-7,000.

2) The entry to correct the error described in item b should include a

a. Debit to inventory-25,000.
b. Debit to retained earnings-25,000.
c. Credit to purchases-25,000.
d. No adjusting entry is needed.

3) The entry to correct the error described in item c should include a

a. Debit to retained earnings-15,500.
b. Credit to retained earnings-15,500.
c. Debit to commission expense-15,500.
d. No adjusting entry is needed.

4) The entry to correct the error described in item d should include a

a. Debit to bad debt expense-30,000.
b. Credit to allowance for bad debts-30,000.
c. Debit to retained earnings-30,000.
d. No adjusting entry is needed.

5) After correcting all the errors described in items a to e, retained earnings should
a. Decrease by 40,500.
b. Increase by 60,500.
c. Increase by 50,500.
d. Increase by 80,500.
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