URDANETA CITY

UNIVERSITY
Owned and operated by the City Government of Urdaneta

Learning Materials
Correction of Errors and Operating Segments

In your answer sheet, write the letter of your answer then present the supporting computation. (3
pts. each)

1. Zamora Co. reported a retained earnings balance of ₱400,000 at December 31, 20X8. In August
20X9, Zamora determined that insurance premiums of ₱60,000 for the three-year period
beginning January 1, 20X8, had been paid and fully expensed in 20X8. Zamora has a 30%
income tax rate. What amount should Zamora report as adjusted beginning retained earnings in
its 20X9 statement of retained earnings?
a. 420,000 b. 428,000 c. 440,000 d. 442,000

ANSWER: B
Supporting Computation:
400,000 + [(60,000 x 2/3) x 70%] = 428,000

2. Alcantara Corp. failed to accrue warranty costs of ₱50,000 in its December 31, 20X4, financial
statements. In addition, a change from straight-line to accelerated depreciation made at the
beginning of 20X5 resulted in a cumulative effect of ₱30,000 on Alcantara's retained earnings.
Both the ₱50,000 and the ₱30,000 are net of related income taxes. What amount should
Alcantara report as prior period adjustment in 20X5?
a. 0 b. 30,000 c. 50,000 d. 80,000

ANSWER: C
Justification:
50,000 – the correction for the prior period error. The change from straight-line to accelerated
depreciation is a change in accounting estimate that should be accounted for prospectively.

3. Petrola Corp. frequently borrows from the bank in order to maintain sufficient operating cash.
The following loans were at a 12% interest rate, with interest payable at maturity. Petrola repaid
each loan on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
11/1/x1 ₱ 5,000 10/31/x2 1 Year
2/1/x2 15,000 7/31/x2 6 Months
5/1/x2 8,000 1/31/x3 9 Months

Petrola records interest expense when the loans are repaid. As a result, interest expense of ₱1,500
was recorded in 20x2. If no correction is made, by what amount would 20x2 interest expense be
understated?
a. 540 b. 620 c. 640 d. 720

ANSWER: A
Solution:
The correct interest expense in 20x2 is computed as follows:
(5,000 x 12% x 10/12) 500
(15,000 x 12% x 6/12) 900
(8,000 x 12% x 8/12) 640
Correct interest expense - 20x2 2,040

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Correct interest expense - 20x2 2,040

Interest expense recognized 1,500
Understatement 540

The next three items are based on the following:

Nuena, Inc., is a calendar year corporation. Its financial statements for the years 20x2 and 20x1
contained errors as follows:
20x2 20x1
Ending inventory ₱1,000 understated ₱3,000 overstated
Depreciation expense ₱800 understated ₱2,500 overstated

4. Assume that the proper correcting entries were made at December 31, 20x1. By how much will
20x2 income before income taxes be overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.

ANSWER: A
Solution:
Ending inventory - 20x2 1,000
Depreciation expense - 20x2 (800)
Understatement 200

The counter-balancing error in 20x1 does not affect the 20x2 profit because proper correcting entries were
made on December 31, 20x1.

5. Assume that no correcting entries were made at December 31, 20x1. Ignoring income taxes, by
how much will retained earnings at December 31, 20x2, be overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.

ANSWER: C
Solution:
Effect on profit (over) under statement:
Errors on: 20x1 20x2
Ending inventory - 20x1 (3,000) 3,000
Ending inventory - 20x2 1,000
Depreciation expense - 20x1 2,500
Depreciation expense - 20x2 (800)
(500) 3,200

Effect on profit - 20x1 (500)

Effect on profit - 20x2 3,200
Effect on R/E, 20x2 - understatement 2,700

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6. Assume that no correcting entries were made at December 31, 20x1, or December 31, 20x2, and
that no additional errors occurred in 20x3. Ignoring income taxes, by how much will working
capital at December 31, 20x3, be overstated or understated?
a. ₱0. c. ₱1,000 understated.
b. ₱1,000 overstated. d. ₱1,700 understated.

ANSWER: A
Justification:
The working capital on December 31, 20x3 is not affected because all of the counter-balancing
errors would have counter-balanced already as of this point. Errors on depreciation do not affect
working capital.

7. Peralta Co.'s beginning inventory at January 1, 20x3, was understated by ₱26,000, and its
ending inventory was overstated by ₱52,000. As a result, Bren's cost of goods sold for 20x3
was,
a. Understated by ₱26,000. c. Understated by ₱78,000.
b. Overstated by ₱26,000. d. Overstated by ₱78,000.

ANSWER:
Solution: C
Effect on COGS -
(over)/understatement
Understatement in beg. Inventory 26,000
Overstatement in end. Inventory 52,000
Net effect on COGS – understatement 78,000

The next three items are based on the following:

The bookkeeper of Abuan Company, which has an accounting year ending December 31, made the
following errors:
 A ₱1,000 collection from a customer was received on December 29, 20x0, but not recorded until
the date of its deposit in the bank, January 4, 20x1.
 A supplier's ₱1,600 invoice for inventory items received in December 20x0 was not recorded
until January 20x1. (Inventories at December 31, 20x0 and 20x1, were stated correctly, based on
physical count.)
 Depreciation for 20x0 was understated by ₱900. In September 20x0, a ₱200 invoice for office
supplies was charged to the Utilities Expense account. Office supplies are expensed as
purchased.
 December 31, 20x0, sales on account of ₱3,000 were recorded in January 20x1.

Assume that no other errors have occurred and that no correcting entries have been made. Ignore
income taxes.

8. Profit for 20x0 was

a. Understated by ₱500. c. Overstated by ₱2,500.
b. Understated by ₱2,100. d. Neither understated nor overstated.

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ANSWER: A
Solution:
Effect on profit (over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on profit - understatement 500

9. Assume the same facts as above. Working capital at December 31, 20x0, was
a. Understated by ₱3,000. c. Understated by ₱1,400.
b. Understated by ₱500. d. Neither understated or overstated.

ANSWER: C
Solution:
Effect on working capital (over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation -
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on working capital - understatement 1,400

10. Assume the same facts as above. Total assets at December 31, 20x0, were
a. Overstated by ₱2,500. c. Understated by ₱2,500.
b. Overstated by ₱2,100. d. None of the above.

ANSWER: D
Solution:
Effect on total assets
(over)/understatement
Unrecorded collection -
Unrecorded purchases (Inventory is
properly stated) -
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales (Unrecorded
accounts receivable) 3,000
Net effect on total assets - understatement 2,100

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11. Cerdan Co. is preparing its year-end financial statements and has identified the following operating
segments:
Segments Revenues Profit (loss) Assets
A 2,000,000 400,000 28,000,000
B 2,400,000 280,000 36,000,000
C 540,000 (140,000) 24,000,000
D 480,000 (1,400,000) 2,000,000
E 580,000 100,000 2,800,000
Totals 6,000,000 (760,000) 92,800,000

Requirement: Identify the reportable segments.

Answer: The reportable segments are segments A, B, C and D.

Solutions:
Revenue test
The threshold under the revenue test is P600,000 or (P6,000,000 x 10%). Segments A and B are
reportable because each of their revenues is at least P600,000 or 10% of the total revenues.

Asset test
The threshold under the revenue test is P9,800,000 or (P92,800,000 x 10%). Segments A, B, and C are
reportable because each of their total assets is at least P9,800,000 or 10% of the total assets.

Profit or loss test

Segments Profit Loss
A 400,000
B 280,000
C (140,000)
D (1,400,000)
E 100,000
Totals 780,000 (1,540,000)

Based on the table above, the aggregate losses of P1,540,000 is higher than the aggregate profits.
Therefore, the 10% limit of profit or loss is P154,000 or (P1,540,000 x 10%). Segments A, B and D are
reportable under this test since each of their reported profits or loss is at least P154,000 or 10% of
P1,540,000.
Based on the tests performed, the reportable segments to be disclosed in ABC’s notes to financial
statements are segments A, B, C, and D.

12. Dela Cruz Company engages in five diversified operations namely, operations A, B, C, D, and E.
Information on these segments are shown below:

Segments Revenues Profit (loss) Assets

A 1,600 400 20,000
B 1,600 200 4,000
C 100 20 2,000
D 300 40 4,000
E 400 140 14,000
Totals 4,000 800 44,000

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Additional information:
a. For internal reporting purposes, segments A and B are considered as one operating segment.
b. Segment E is considered as an operating segment for internal decision making purposes.
c. Segments C and D have similar economic characteristics and share a majority of the aggregation
criteria.

Requirement: Identify the reportable segments.

Answer: Dela Cruz Co. shall disclose three reportable segments in its notes to financial statements,
namely, “A/B,” “E” and “C/D.”

Solution:
Under the “management approach,” segments A and B (aggregated as one segment) and segment E
are reportable operating segments because these segments are used by ABC Co. in its internal
reporting.

Segments C and D are subjected to the quantitative thresholds as shown below:

Segments Revenues Revenue test Profit Profit test Assets Asset test
A 1,600 N/A 400 N/A 20,000 N/A
B 1,600 N/A 200 N/A 4,000 N/A
C 100 3% 20 3% 2,000 5%
D 300 8% 40 5% 4,000 9%
E 400 N/A 140 N/A 14,000 N/A
Totals 4,000 800 44,000

Segments C and D do not individually meet any of the quantitative thresholds. However, since the
problem states that segments C and D have similar economic characteristics and share a majority
of the aggregation criteria, they are aggregated and tested if their combined results qualify under
the quantitative thresholds.

The combined revenue of C and D of P400 (100 + 300) is equal to the revenue threshold of P400
(4,000 x 10%). Therefore, C and D shall be disclosed as one reportable segment.

ABC Co. shall disclose three reportable segments in its notes to financial statements, namely,
“A/B,” “E” and “C/D.”

13. Alvarez Co. is preparing its year-end financial statements and has identified the following operating
segments:
External Inter-segment Total
Segments revenues revenues revenues Profit Assets
A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000
B 800,000 200,000 1,000,000 800,000 14,000,000
C 500,000 - 500,000 200,000 2,000,000
D 400,000 400,000 160,000 1,600,000
E 300,000 300,000 140,000 1,400,000
F 200,000 200,000 100,000 1,000,000
Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000

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Management believes that between segments C, D, E and F, segment C is most relevant to external users
of financial statements.

Requirement: Identify the reportable segments.

Answer: The three reportable segments are segments A, B, and C. The other segments are
combined and disclosed as “all other segments.”

Solution:
Under the revenue test, segments A and B are reportable because they each have total revenues
(external and internal) exceeding the threshold of P600,000 or (6,000,000 x 10%).

Under the profit or loss test, segments A and B are reportable because they each have profit
exceeding the threshold of P280,000 (2,800,000 x 10%).

Under the total assets test, segments A and B are reportable because they each have total assets
exceeding the threshold of P4,400,000 (44,000,000 x 10%).

However, the sum of the external revenues of segments A and B does not meet the 75% limit as
shown below:

Segments External revenues

A 2,400,000
B 800,000
Total external revenues of A and B 3,200,000

Total entity's external revenues 4,600,000

Multiply by: 75%
Limit on external revenues of reportable segments 3,450,000

Since management believes that of the other segments (i.e., C, D, E, and F), information on segment
C is most relevant to users, segment C shall be disclosed as a reportable segment even if it does
not meet any of the quantitative thresholds in order for the “75% limit” to be met.

If segment C is included as reportable segment, the total external revenues of reportable segments
A, B, and C is P3,700,000 (2,400,000 + 800,000 + 500,000) which meets the “75% limit” of P1,725,000.

14. Valerio Co. has the following information on its operating segments.
External Inter-segment Total
Segments revenues revenues revenues Profit Assets
A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000
B 800,000 200,000 1,000,000 800,000 14,000,000
C 500,000 - 500,000 200,000 2,000,000
D 400,000 - 400,000 160,000 1,600,000
E 300,000 - 300,000 140,000 1,400,000
F 200,000 - 200,000 100,000 1,000,000
Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000

Question: Valerio Co. shall provide disclosure for major customers if revenues from transactions with a
single external customer amount to how much?
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Answer:
At least P460,000 or (10% x P4,600,000 total external revenues)

Prepared by:

REMEDIOS A. PALAGANAS, CPA, MBA

Assistant Professor IV

Approved:

DR. PELILIA C. VELOSO, CPA, LLB

Dean, College of Business Management and Accountancy

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