HOMEWORK ON

CORRECTION OF
ERRORS
Brief Exercise 16-9
 
When DeSoto Water Work purchased a machine at the
end of 2021 at a cost of ₱65,000, the company debited
Buildings and credited Cash ₱65,000. The error was
discovered in 2022.

What journal entry will DeSoto use to correct the error?

What other step(s) would be taken in connection with
the error?
To correct the error:
Machinery 65,000
Buildings 65,000
 
Other step(s) that would be taken in connection with the
error:
When comparative statement of financial positions is reported
that includes 2021, the 2021 statement of financial position
would be restated to reflect the correction. A disclosure note
should describe the error and the impact of its correction on each
affected line item.
Brief Exercise 16-10

In 2022, internal auditors discovered that PKE Displays Ltd

had debited an expense account for the ₱350,000 cost of a
machine purchased on January 1, 2019. The machine useful
was expected to be five years with no residual value.
Straight-line depreciation is used by PKE.
Ignoring income taxes, what journal entry will PKE use to
correct the error?
ANALYSIS Correct (Should Have Been Recorded) Incorrect (As Recorded)
2019 Equipment 350,000 Expense 350,000
Cash 350,000 Cash 350,000
2019 Depreciation expense 70,000 depreciation entry
Acc. Depreciation 70,000 omitted

2020 Depreciation expense 70,000 depreciation entry

Acc. Depreciation 70,000 omitted
2021 Depreciation expense 70,000 depreciation entry
Acc. Depreciation 70,000 omitted

Correcting entry
Equipment 350,000
Accumulated depreciation (₱70,000 × 3 years) 210,000
Retained earnings (₱350,000 − 140,000) 140,000
Brief Exercise 16-11

In 2022, internal auditors discovered that PKE Displays Ltd had

debited an expense account for the ₱350,000 cost of a machine
purchased on January 1, 2019. The machine useful was
expected to be five years with no residual value. Straight-line
depreciation is used by PKE.
Assume the error was discovered in 2024 after the 2023
financial statements are issued.
Ignoring income taxes, what journal entry will PKE use to
correct the error?
No correcting entry would be required because, after five
years, the accounts would show appropriate balances.
Brief Exercise 16-12
In 2022, the internal auditors of Mustafa Technologies Ltd discovered
that
(a) 2021 accrued salaries and wages of ₱2 million were not recognized
until they were paid in 2022 and
(b) a ₱3 million purchase of merchandise in 2022 was recorded in 2021
instead. The physical inventory count at the end of 2021 was correct.
Ignoring income taxes, what journal entries are needed in 2022 to
correct each error? Also briefly describe any other measures Mustafa
Technologies would take in connection with the correcting errors.
Error a
2021 Statement of profit or loss: Expenses understated, net
income overstated.
2021 Statement of financial position: Liabilities understated,
retained earnings overstated.

Retained earnings 2,000,000

Wages expense 2,000,000
Error b
1. To include the ₱3 million in year 2022 purchases and increase retained earnings to
what it would have been if 2021 cost of goods sold had not included the ₱3 million
purchases.

Purchases 3 million
Retained earnings 3 million
2. The 2021 financial statements that were incorrect as a result of the error would be
retrospectively restated to reflect the correct cost of goods sold (income tax expense if
taxes are considered), net profit, and retained earnings when those statements are
reported again for comparative purposes in the 2022 annual report.
3. Because retained earnings is one of the accounts incorrectly stated accounts, the
correction to the RE account is reported as a prior period adjustment to the 2021 RE
balance in the comparative SoCE.
4. Also, a disclosure note should describe the nature of the error and the impact of its
correction on each affected line item on the financial statements and earnings per share.
Exercise 16-21
Below are three independent and unrelated errors.
a. On December 31, 2021, Wolfe-Bache Company failed to accrue office
supplies expense of ₱1,800. In January 2022, when it received the bill
from its supplier, Wolfe-Bache made the following entry:
Office supplies expense 1,800
Cash 1,800
b. On the last day of 2021, Mideast Importers received a ₱90,000
prepayment from a tenant for 2022 rent of a building. Mideast
recorded the receipt as rent revenue.
c. At the end of 2021, Chen Company failed to accrue interest of ₱8,000
on a note receivable. At the beginning of 2022, when the company
received the cash, it was recorded as interest revenue.
Required:
For each error:
1. What would be the effect of each error on the statement of profit or
loss and the statement of financial position in the 2021 financial
statements?
2. Prepare any journal entries each company should record in 2022 to
the correct the errors.
Error a
Statement of profit or loss: Expenses understated, net
profit overstated.
Statement of financial position: Liabilities understated,
retained earnings
overstated.
 
Retained earnings 1,800
Office supplies expense 1,800
Error b
Statement of profit or loss: Revenue overstated, net profit
overstated.
Statement of financial position: Liabilities understated,
retained earnings overstated.
 
Retained earnings 90,000
Rent revenue 90,000
Error c
Statement of profit or loss: Revenue understated, net profit
understated.
Statement of financial position: Assets understated, retained
earnings understated.
 
Interest revenue 8,000
Retained earnings 8,000
Exercise 16-22
For each of the following inventory errors occurring in 2022, determine the effect of the error on
2022’s cost of goods sold, net profit, and retained earnings. Assume that the error is not
discovered until 2023 and that a periodic inventory system is used. Ignore income taxes.
U = Understated O = Overstated NE = No effect
COGS Net Profit RE
1. Overstatement of ending inventory U O O
2. Overstatement of purchases O U U
3. Understatement of beginning inventory U O O
4. Understatement of freight-in charges U O O
5. Understatement of ending inventory O U U
6. Understatement of purchases U O O
7. Overstatement of beginning inventory O U U
8. Understatement of purchases and understatement of ending NE NE NE
inventory, by the same amount
Exercise 16-22

U = understated
O = overstated
NE= no effect
Cost of Net Retained
Goods Sold Income Earnings
1. Overstatement of ending inventory U O O
2. Overstatement of purchases O U U
3. Understatement of beginning inventory U O O
4. Freight-in charges are understated U O O
5. Understatement of ending inventory O U U
6. Understatement of purchases U O O
7. Overstatement of beginning inventory O U U
8. Understatement of purchases and
understatement of ending inventory, by
the same amount NE NE NE
Problem 16-10
You have been hired as the new controller for Rasheed Company. Shortly
after joining the company in 2022, you discover the following errors to
the 2020 and 2021 financial statements:
a. Inventory at December 31, 2020, was understated by ₱6,000.
b. Inventory at December 31, 2021, was overstated by ₱9,000.
c. On December 31, 2021, inventory was purchased for ₱3,000. The
company did not record the purchase until the inventory was paid for
early in 2022. At that time, the purchase was recorded by a debit to
purchases and a credit to cash.
The company uses a periodic inventory system.
Required:
1. Assuming that the errors were discovered after the 2021 financial
statements were issued, analyze the effect of the errors on 2021
and 2020 cost of goods sold, net profit, and retained earnings.
(Ignore income taxes.)
2. Prepare journal entry to correct the errors.
3. What other step(s) would be taken in connection with the error?
Requirement 1
 
Analysis: U = Understated O = Overstated
2020 2021
Beginning inventory ® Beginning inventory
U-6,000
Plus: Net purchases  Plus: Net purchases
U-3,000
Less: Ending inventory U-6,000 Less: Ending inventory O-9,000
Cost of goods sold O-6,000 Cost of goods sold U-18,000

Revenues Revenues
Less: Cost of goods sold O-6,000 Less: Cost of goods sold U-18,000
Less: Other expenses Less: Other expenses
Net profit U-6,000 Net profit O-18,000
 
Retained earnings U-6,000 Retained earnings O-12,000
Requirement 2
Retained earnings 12,000
Inventory 9,000
Purchases 3,000
Requirement 3
The financial statements that were incorrect as a result of both errors
(effect of one error in 2020 and effect of three errors in 2021) would be
retrospectively restated to report the correct inventory amounts, cost of
goods sold, income, and retained earnings when those statements are
reported again for comparative purposes in the 2022 annual report. A
prior period adjustment to retained earnings would be reported, and a
disclosure note should describe the nature of the error and the impact
of its correction on each line items affected, and earnings per share.
Problem 16-11
The Madras Company purchased office equipment at the beginning of
2020 and capitalized a cost of ₱2,000,000. This cost included the
following expenditures:
Purchase price ₱1,850,000
Freight charges 30,000
Installation charges 20,000
Annual maintenance charge 100,000
Total ₱2,000,000
The company estimated an eight-year useful life for the equipment. No
residual value is anticipated. The double-declining balance method was
used to determine depreciation expense for 2020 and 2021.
In 2022, after the 2021 financial statements were issued, the company
decided to switch to the straight-line depreciation method for this
equipment. At that time, the company’s controller discovered that the
original cost of the equipment incorrectly included one year of annual
maintenance charges for the equipment.
Required:
1. Ignoring income taxes, prepare appropriate correcting entry for the
equipment capitalization error discovered in 2022.
2. Ignoring income taxes, prepare any 2022 journal entry(s) related to
the change in depreciation methods.
Requirement 1
Correct (Should Have Been Recorded) Incorrect (As Recorded)
2021 Equipment 1,900,000 Equipment 2,000,000
Repairs expense 100,000 Cash 2,000,000
Cash 2,000,000
2021 Depreciation expense 475,000 Depreciation expense 500,000
Acc. depreciation 475,000 Acc. depreciation 500,000
2022 Depreciation expense 356,250 Depreciation expense 375,000
Acc. depreciation 356,250 Acc. depreciation 375,000

$1,900,000 × 25% (two times the straight-line rate of 12.5%) = 475,000

$2,000,000 × 25% = 500,000
($1,900,000 − 475,000) × 25% = 356,250
($2,000,000 − 500,000) × 25% = 375,000
To correct incorrect accounts
Retained earnings 56,250
Accumulated depreciation 43,750
Equipment 100,000
Requirement 2
This is a change in accounting estimate. No entry is needed to record
the change.
 
2022 adjusting entry:
Depreciation expense 178,125
Accumulated depreciation 178,125
Asset’s cost (after correction) ₱1,900,000
Accumulated depreciation to date (₱475,000 + 356,250) (831,250)
Undepreciated cost, January 1, 2022 ₱1,068,750
Remaining useful life 6 years
Annual straight-line depreciation 2022–2027 ₱ 178,125