Problem 9 The Corporation prepared its own income statement for the years 2005 and 2006.

The
President was not satisfied and decided to engage the services of a CPA. The following errors were
discovered by the CPA: ___2005__ ___2006___ Net income after income tax P 123,250 P 156,250
Inventory understatement at year-end P - P 12,500 Prepaid expenses not taken up 5,000
15,000 Merchandise purchased on account not Recorded as liability but included in

23

inventory 25,000 Unearned rent received taken into income 9,000 Accrued taxes
unrecorded 20,000 15,000

Questions 1. Net income of 2005 is: a. P 163,250 b. P 108,250 c. P 83,250 d. P 73,250

2. Net income of 2006 is: a. P 199,750 b. P 174,750 c. P 144,750 d. P 142,250

Solution 2005 2006 Unadjusted net income 123,250 156,250 12,500 5,000 (5,000) 15,000 (25,000)
25,000 (9,000) (20,000) 20,000 __________ (15,000) Adjusted net income 83,250 199,750 Answer: 1.
C 2. A

Problem 1O Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash
basis during the year

Wizard is in the process of negotiating a bank loan to finance the planned expansion of its business. The
bank is requesting 2006 financial statements prepared on the accrual basis of accounting from Wizard.
As Wizard’s external auditor, you were called upon to assist in preparing the financial statements. The
following information were obtained during the course of your engagement: Wizard Company TRIAL
BALANCE December 31, 2006 Debits Credits Cash P448,000 Accounts receivable, 12/31/05
283,500 Inventory, 12/31/05 1,085,000 Furniture & Fixtures 2,068,500 Leasehold
improvements 787,500 Accumulated depreciation, 12/31/05 P 567,000 Accounts payable
297,500 Wizard, Drawings Wizard, Capital, 12/31/05 2,180,500 Sales
11,427,500 Purchases 5,339,250 Salaries expense 3,045,000 Taxes and licenses
217,000 Insurance expense 152,250 Rent expense 598,500 Utilities expense 220,500
Living expenses 227,500 _________ P
14,472,500 P 14,472,500

24
Additional information:

1. At December 31, 2006, amounts due from customers totaled P415,000.

2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.

3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31, 2006 and
December 31, 2005 respectively.

4. The inventory totaled P1,274,000 based on a physical count of the goods at December 31, 2006. The
inventory was priced at cost, which approximates market value.

5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage for one year.
The premium on the previous policy, which expired on April 30, 2006, was P136,500.

6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant lot adjacent
Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard paved and fenced in the lot at a
cost of P787,500. The improvements were completed on April 1, 2006, and estimated to have a useful
life of fifteen years. No provision for depreciation has been recorded. Depreciation on furniture and
fixtures was P210,000 for 2006.

7. Accrued expenses at December 31, 2006 and 2005 were as follows: 2006 2005 Taxes and licenses
P33,750 P20,250 Utilities 36,000 24,750 P69,750 P45,000

8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance policy is
limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome is probable and that a
reasonable estimate of the settlement is P3,000,000.

9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also receives P4,375
per week for living expenses.

Questions Determine the balances of the following under the accrual basis of accounting.
1. Accounts Receivable a. 415,000 b. P 283,500 c. P 131,500 d. P 152,000

2. Accounts Receivable, net a. P 408,425 b. P 404,625 c. P 394,250 d. P 262,500

3. Inventory a. P 1,274,000 b. P 1,085,000 c. P 189,000 d. P 896,000

4. Prepaid Insurance a. P 147,000 b. P 96,250 c. P 50,750 d. P0

5. Property and equipment, net a. P 2,856,000 b. P 2,616,469 c. P 2,039,625 d. P 1,858,500

25

6. Accounts payable a. P 533,750 b. P 523,750 c. P 297,500 d.P 236,250

7. Accrued Expenses a. P 114,750 b. P 69,750 c. P 24,750 d. P0

8. Wizard, Drawings a. P 707,500 b. P 480,000 c. P 227,500 d. P0

9. Wizard, Capital, 12/31/05 a. P 2,226,000 b. P 2,181,000 c. P 2,180,500 d. P 2,135,500

10. Sales a. P 11,842,500 b. P 11,559,000 c. P 11,427,500 d. P 11,296,000

11. Purchases a. P 5,873,000 b. P 5,575,500 c. P 5,339,250 d. P 5,103,000

12. Salaries Expense a. P 3,272,500 b. P 3,045,000 c. P 2,655,000 d. P 2,565,000

13. Taxes and licenses a. P 250,750 b. P 230,500 c. P 217,000 d. P 203,500

14. Insurance expense a. P 197,750 b. P 147,000 c. P 152,250 d. P 101,500

15. Utilities expense a. P 256,500 b. P 231,750 c. P 220,500 d. P 195,750

16. Doubtful account expense a. P 20,750 b. P 10,375 c. P 6,575 d. P 0

17. Depreciation expense a. P 294,375 b. P 249,375 c. P 239,531 d. P 210,000

18. Cost of sales a. P 5,386,500 b. P 5,368,500 c. P 5,150,250 d. P 4,065,000

19. Estimated loss from lawsuit a. P 4,000,000 b. P 3,000,000 c. P 500,000 d. P0

Solution 1. A - P415,000 given in item no. 1 2. C - P394,250 (P415,000 – P20,750 item no. 2) 3. A -
P1,274,000 given in item no. 4 4. C - P152,250 x 4/12 = P50,750 5. C Furniture & fixtures 2,068,500
Leasehold improvements 787,500 Less: Accumulated dep’n – 1/1/02 ( 567,000) 2002 Depreciation
– improve. ( 39,375) 2002 Dep’n – furniture ( 210,000) Carrying value – 2002 2,039,625 6. A -
P533,750 given in item no. 3 7. B - P69,750 given in item no. 7

26

8. A Salaries – P40,000 x 12 - P 480,000

8. A Salaries – P40,000 x 12 - P 480,000 Living allowance P4,375 x 52 weeks - 227,500 Total

707,500 9. B Capital – beg. 2,180,500 Omission of prepaid expense in 2001 45,500 Omission of
accrued expenses in 2001 ( 45,000) Total 2,181,000 10. B Sales – cash basis - 11,427,500 + AR –
end - 415,000 - AR – beg - 283,500 Sales – accrual basis - 11,559,000 11. B Purchases – cash
basis - 5,339,250 + AP – end - 533,750 - AP – beg - 297,500 Purchases – accrual basis -
5,575,500 12. D Salaries per record - 3,045,000 - Salaries of the proprietor * - 480,000 Adjusted
Salaries - 2,565,000 * Salaries of the proprietor for a partnership is considered as part of profit
distribution 13. B Taxes and licenses – cash basis - 217,000 + Accrued taxes – end - 33,750 -
Accrued taxes – beg - 20,250 Taxes and licenses – accrual basis - 230,500 14. B Insurance
expense – cash basis - 152,250 + Prepaid insurance – beg - 45,500 - Prepaid insurance – end -
50,750 Insurance expense – accrual basis - 147,000 15. B Utilities – cash basis - 220,500 + Accrued
utilities – end - 36,000 - Accrued utilities – beg - 24,750 Utilities – accrual basis - 231,750 16. A
– given in item # 2 17. B – refer to Question # 5 question 18. A Beginning inventory - 1,085,000
Purchases - 5,575,500 Ending inventory - (1,274,000) Cost of Sales - 5,386,500 19. C Since there
is a comprehensive insurance policy for the damage, only P500,000 will be charged as loss (3M – 2.5M)
Problem 11 You have been engaged to examine the financial statements of Vince Corporation for the
year ended December 31, 2006. In the course of your examination, you have ascertained the following
information:

1. Vince uses the allowance method of accounting for uncollectible trade accounts receivable. The
allowance is based upon 3% of past due accounts (over 120 days) and 1% of current accounts as of the
close of each month. Due to the changing economic conditions and climate, the amount of past due
accounts has increased significantly, and management has decided to increase the percentage based on
past due accounts to 5%. The following balances are available:

27

As of Nov. 30, 2006

As of Dec. 31, 2006

Debit Credit Debit Credit Accounts Receivable P 390,000 - P 430,000 - Past due accounts (included in
Accounts Receivable) 12,000 - 30,000 - Allowance for uncol- lectible accounts - P 28,000

9,000 -

2. The merchandise inventory on December 31, 2005 did not include merchandise having a cost of
P7,000.00 which was stored in a public warehouse. Merchandise having a cost of P3,000.00 was
erroneously counted twice and included twice in the merchandise inventory on December 31, 2006.
Vince uses a periodic inventory system.

3. On January 2, 2006, Vince had a new machine delivered and installed in its new factory. The cost of
this machine was P97,000.00 and the machine is being depreciated on a straight-line method over an
estimated useful life of 10 years. When the new machine was installed, Vince paid for the following
items which were not included in the cost of the machine, but were charged to repairs and
maintenance: Delivery Expense - P 2,500.00 Installation Costs - 8,000.00 Rearrangement of related
Equipment - 4,000.00 P14,500.00

4. On May 3, 2006, Vince exchanged 500 shares of treasury stock (P50.00 par value common stock) for a
parcel of land to be used as a site for a new factory. The treasury stock had a cost P70.00 per share
when it was acquired and on May 03, 2006, it had a fair value of P80.00 per share. Vince received
P2,000.00 when an existing building on the land was sold for scrap. The land was capitalized at
P40,0000.00 and Vince recorded a gain of P5,000.00 on the sale of its treasury stock.

You found the following journal entries in the books: Land . . . . . . . . . . . . . . . P 40,000.00
Treasury stock . . . . . . . . . . . . . . P 35,000.00 Gain on Sale of treasury stock . . . . .
5,000.00 Cash . . . . . . . . . . . . . . . P 2,000.00 Miscellaneous Income . . . . . . . . . . P
2,000.00

5. On January 02, 2006, Vince Corporation established a noncontributory defined benefit plan covering
all employees and contributed P 1,000,000.00 to the plan and charged this amount to the “pension
expense”. At December 31, 2006, Vince determined that the 2006 current service and interest costs on
the plan amount to P 620,000,00. The expected and actual rate of return on plan assets for 2006 was
10%.

Questions 1. The allowance for uncollectible accounts to be reported on the Balance Sheet is: a. P
14,500.00 b. P 9,000.00 c. P 5,500.00 d. P 4,000.00

2. Doubtful account expense at December 31, 2006 is: a. P 14,500.00 b. P 9,000.00 c. P 5,500.00 d. P
4,000.00

28

3. 2006 merchandise inventory is: a. Understated by P 10,000.00 c. Overstated by P 3,000.00 b.

Understated by P 4,000.00 d. Overstated by P 4,000.00

4. If no proper correcting entries were made at December 31, 2005, by how much will 2005 net income
before income taxes be overstated or understated? a. Understated by P7,000.00 c. Overstated by P
7,000.00 b. Understated by P4,000.00 d. Overstated by P 4,000.00

5. Machinery and equipment account should be reported in the balance sheet (net of accumulated
depreciation) at December 31, 2006: a. P 100,350.00 b. P 110,050.00 c. P 111,500.00 d. P 101,800.00

6. Land account should be reported in the balance sheet at December 31, 2006: a. P 35,000.00 b. P
33,000.00 c. P 40,000.00 d. P 38,000.00
7. What should be reported at December 31, 2006 as prepaid pension cost? a. P 620,000.00 b. P
520,000.00 c. P 1,000,000.00 d. P 480,000.00

8. What amount should be reported as pension expense in 2006? a. P 620,000.00 b. P 520,000.00 c. P

1,000,000.00 d. P 480,000.00

9. How much gain should be reported on item no. 4? a. P 5,000.00 b. P 15,000.00 c. P 10,000.00 d.
P0

10. If no proper correcting entries were made at December 31, 2006, by how much will 2006 net
income before income taxes be overstated or understated? a. Understated by P 493,450.00 c.
Overstated by P 539,050.00 b. Understated by P 534,050.00 d. Overstated by P 498,450.00

Solution (1) Doubtful Account Expense 14,500.00 Allowance for D/A 14,500.00 Required
allowance as of 12.31.2006 -on past due accounts (5% x P30,000.00) P 1,500.00 -on current accounts
(1% x P400,000.00) 4,000.00 Total P 5,500.00 Unadjusted “debit” balance of Allowance for D/A
9,000.00 Additional Provision (expense) P14,500.00 (2) a. Merchandise Inventory, 01.01.2006
7,000.00 Retained Earnings 7,000.00 (to correct understatement of inventory at end of 2005) b.
Cost of Sales 3,000.00 Merchandise Inventory, 12.31.2006 3,000.00 (to correct
overstatement ending inventory for 2006) (3) a. Machinery 14,500.00 Repairs and Maintenance
14,500.00 (to reclassify delivery and installation costs) b. Depreciation Expense 1,450.00
Accumulated Depreciation 1,450.00 (to provide for depreciation for items not capitalized) (4)
Miscellaneous Income 2,000.00 Gain on Sale of Treasury Stock 5,000.00 Land
2,000.00 APIC-T/S 5,000.00 (to correct client’s entry on the purchase of land) (5) Prepaid
Pension Cost 480,000.00 Pension Expense 480,000.00 (to correct client’s entry in the
treatment of prepaid pension cost)

29

Current Service and interest cost P 620,000.00 Expected return on Plan Asset (P
1,000,000.00 x 10%) ( 100,000.00)_ Pension Expense P 520,000.00 Reported pension
expense 1,000,000.00 Prepaid Pension Cost P 480,000.00 Answer: 1. C 2. A 3.
C 4. A 5. A 6. D 7. D 8. B 9. D 10. D

Problem 12 Ron-Ron Storage underwent a restructuring in 2006. The company conducted a thorough
internal audit, during which the following facts were discovered. The audit occurred during 2006 before
any adjusting entries or closing entries are prepared.
a. Additional printers were acquired at the beginning of 2004 and added to the company’s office
network. The P9,000 cost of the printers was inadvertently recorded as maintenance expense. The
printers have five-year useful lives and no material salvage value. This class of equipment is depreciated
by the straight-line method.

b. Three weeks prior to the audit, the company paid P51,000 for storage boxes and recorded the
expenditure as office supplies on hand. The error was discovered a week later.

c. On December 31, 2005, inventory was understated by P112,000 due to a mistake in the physical
inventory count. The company uses the periodic inventory system.

d. Three years earlier, the company recorded a 3% stock dividend (4,000 common shares, P1) as follows:
Retained earnings 4,000 Common stock 4,000

The shares had a market price at the time of P10 per share.

e. At the end of 2005, the company failed to accrue interest expense that accrued during the last four
months of 2005 on bonds payable. The bonds which were issued at face value mature in 2010. The
following entry was recorded on March 1, 2006, when the semi-annual interest was paid:

Interest expense 180,000 Cash 180,000

f. A three-year liability insurance policy was purchased at the beginning of 2005 for P216,000. The full
premium was debited to insurance expense at the time.

Questions

1. Net income of 2004 is: a. Overstated by P9,000 c. Overstated by P7,200 b. Understated by P9,000
d. Understated by P7,200

2. Net income of 2005 is a. Understated by P374,200 c. Understated by P89,800 b. Understated by

P134,200 d. Overstated by P81,800
30

3. Net income of 2006 is a. Overstated by P65,800 c. Overstated by P305,800 b. Overstated by

P185,800 d. Understated by P38,200

4. Accrued interest on Bonds Payable is a. P 60,000 b. P 80,000 c. P 120,000 d. P 180,000

Solution 2004 2005 2006 A 9,000 (1,800) (1,800) (1,800) B C 112,000 (112,000) D E (120,000)
120,000 (120,000) F _________ 144,000 (72,000) Under/(Over) 7,200 134,200 185,800 Answer: 1. D 2.
B 3. B 4. C

Problem 13 You been asked by a client to review the records of the Claire Joy Company, a small
manufacturer of precision tools and machines. Your client is interested in buying the business, and
arrangements have been made for you to review the accounting records.

Your examination reveals the following:

a. Claire Joy Company commenced business on April 1, 2003, reporting on a fiscal year ending March 31.
The company has never been audited, but the annual statements prepared by the bookkeeper reflect
the following income before closing and before deducting income taxes:

Year Ended March 31 Income Before Taxes 2004……………………………………… P 71,600

2005……………………………………… 111,400 2006……………………………………… 103,580

b. A relatively small number of machines have been shipped on consignment. These transactions have
been recorded as an ordinary sale and billed as such. On March 31 of each year, machines billed and in
the hands of consignees amounted for: 2004…………………………………….. P7, 800
2005…………………………………….. none 2006…………………………………….. 5, 590

Sales price was determined by adding 30% to cost. You learned that the consigned goods were sold the
following year.
c. On March 30, 2005, two machines were shipped to a customer on a C.O.D. basis. The sale was not
entered until April 5, 2005 when cash was received for P6,100. The machines were not included in the
inventory at March 31, 2005. (Title passed on March 30, 2005).

d. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be
in connection with the warranty will amount to ½ of 1% of sales. The company has charged an expense
account for warranty costs incurred.

31

Sales per books and warranty costs were: Warranty of Expense for Sales Made in Year Ended
March 31 Sales 2004 2005 2006 Total 2004 P940, 000 P760 P760 2005 1, 010, 000
360 P1, 310 1, 670 2006 1, 795, 000 320 1, 620 P1, 910 3, 850

e. The bank deducts 6% on all contracts financed. Of this amount ½% is place in a reserve to the credit
of Claire Joy Company, which is refunded to Claire Joy as finance contracts are paid in full. The reserve
established by the bank has not been reflected in the books of Claire Joy. The excess of credits over
debits (net increase) to the reserve account with Claire Joy, on the books of the bank for each fiscal year
were as follows: 2004…………………………………. P 4, 000 2005…………………………………. 4, 000
2006…………………………………. 5, 000 P 14, 000

f. A delivery equipment with a 10-year life (no residual value, straight-line depreciation) was purchased
on April 1, 2005 by issuing a P 600,000 non- interest- bearing, 4 year note. The entry made to record the
purchase was a debit to Delivery Equipment and a credit to Notes payable for P 600,000; a 10% is a fair
rate of interest on the note. The accountant failed to provide for depreciation for the year on this
equipment.

g. For the last three (3) years, the company has failed to accrue salaries and wages. The correct
amounts at the end of each fiscal year were: 2004…………………………………. P 12, 000
2005…………………………………. 18, 000 2006…………………………………. 10, 000

Questions Answer the following questions based on the audit findings. Ignore income tax implications.

1. The adjusting entry to set up the estimated Liability under Warranties is a. Warranty expense 5,411
Retained earnings 7,006 Estimated liability under warranties 12,417 b. Retained earnings 5,411
Warranty expense 7,006 Estimated liability under warranties 12,417 c. Warranty expense
12,417 Estimated liability under warranties 12,417 d. Retained earnings 12,417 Estimated
liability under warranties 12,417

2. The total receivable from the bank representing dealers fund reserve as of March 31, 2006 is: a. P
5,100 b. P 6,900 c. P 12,000 d. P 14,000

3. Sales in 2004 were (over) understated by a. P 6,500 b. P (6,500) c. P 7,800 d. P (7,800)

4. Sales in 2006 were (over) understated by: a. P 6,500 b. P (6,100) c. P (5,590) d. P (11,690)

32

5. The accrued Salaries Payable that should be set up on March 31, 2006 is: a. P 18,000 b. P 28,000 c. P
10,000 d. P 40,000

6. The audited balance of Discount on Note Payable as of March 31, 2006 is: a. P 0 b. P 102, 452 c. P
149, 211 d. P 190, 192 7. Depreciation Expense for fiscal year 2006 that should be provided on the
equipment purchased on April 1, 2005 is a. P 13,660 b. P 40,981 c. P 60,000 d. P 66,000

Solution

Adjusting entry:

b. Sales 5,590 Accounts receivable 5,590 Inventory 4,300 Cost of sales 4,300 c. Sales 6,100
Retained earnings - beg 6,100 d. Warranty expense 12,417 Estimated warranty payable 12,417
2004 940,000 – 7,800 = 932,200 2005 1,010,000 + 6,100 – 7,800 = 1,023,900 2006 1,795,000 – 5,590
– 6,100 = 1,783,310 Adjusted balance = 3,739,410 X ½ of 1% = .005 Total Warranty expense
= 18,697 Less: Warranty paid = 6,280 Estimated warranty liability = 12,417 e. Fund reserve
from the bank 14,000 Other income 14,000 f. OE: Delivery equipment 600,000 Notes payable
600,000 CE: Delivery equipment 409,808 Discount on NP 190,192 Notes payable 600,000 Adj:
Discount on NP 190,192 Delivery equipment 190,192 Adj: Interest expense 40,981 Discount on
NP 40,981 P409,808 x 10% = P 40,981 g. Retained earnings 18,000 Salaries 18,000 Salaries
10,000 Accrued salaries 10,000
Answer: 1. C 2. D 3. D 4. D 5. C 6. C 7. B

Problem 14 You are auditing the accounts of Keith Zandro Merchandising Corporation for the year
ended December 31, 2006. You discover that the adjustments made in the previous audit for the year
2005 were not entered in the accounts by Keith Zandro’s bookkeeper; therefore, the accounts are not in
agreement with the audited amounts as of December 31, 2005. The following adjustments were
included in the 2005 audit report:

a. Invoices for merchandise purchased on credit in December 2005 were not entered on the books until
payment of P12,000 was made in January 2006. The merchandise was not included in the December 31,
2005 inventory. The company uses a periodic inventory system.

33

b. Invoices for merchandise received on credit in December 2005 were not recorded in the accounts
until payment was made in January 2006; the goods were included in the 2005 ending inventory,
P18,000.

c. Allowance for doubtful accounts for 2005 was understated by P2,000 because bad debts expense in
2005 was not recorded.

d. Selling expense for 2005, P5,000, was not recorded in the accounts until paid in 2006.

e. Accrued wages of P4,000 at December 31, 2005, were not recorded in the accounts until paid in
January 2006.

f. Prepaid insurance at December 31, 2005 was understated by P600 because this amount was included
in 2005 expense. The insurance policy expires on December 31, 2006.

g. Income tax expense of P2,400 for the last part of the year ended December 31, 2005, was not
recorded until paid in January 2006.

h. Depreciation of P9,000 was not recorded for 2005.

Questions: Based on the information given, answer the following:

1. Net income of 2005 is overstated by a. P 40,400 b. P 39,800 c. P 38,400 d. P 29,400

2. Net income of 2006 is understated by a. P 40,800 b. P 39,800 c. P 28,800 d. P 27,800

3. Operating expenses of 2005 is understated by a. P 21,800 b. P 21,800 c. P 20,600 d. P 19,400

4. Operating expense of 2006 is overstated by a. P 21,800 b. P 10,800 c. P 9,000 d. P 8,400

5. Cost of sales of 2006 is a. Overstated by P18,000 c. Understated by P6,000 b. Understated by

P18,000 d. Not affected with error

Solution NET INCOME 2005 2006 A. Omission of purchases (12,000) 12,000 Omission
of inventory 12,000 (12,000) B. Omission of purchases (18,000) 18,000 C. (2,000) D (5,000) 5,000 E
(4,000) 4,000 F 600 (600) G (2,400) 2,400 H (9,000) _______ (39,800) 28,800

34

OPERATING EXPENSES 2005 2006 A B. C. (2,000) D

(5,000) 5,000 E (4,000) 4,000 F 600 (600) G H (9,000) _______ (19,400) 8,400 Answer: 1. B 2. C 3. D 4.
D 5. A

Pro0blem 15 Tuburan Company was organized during 2002 by three technical experts to assemble
(parts to be purchased from suppliers) and market an electronic device that they had previously
patented. No products were sold during 2002; however, 2003 and 2004 produced significant sales, but
modest profits. During 2003, the company hired bookkeeper who, although very industrious, had very
little knowledge of accounting. Realizing this competency problem, the company is considering engaging
an outside independent CPA to as they said “straighten things out and make recommendations.” Among
numerous other accounting problems, adjusting entries have never been made. The bookkeeper stated
that “the transactions are recorded in the right way when they occur.”

The following 2005 transactions, and the way in which the bookkeeper recorded or explained them, are
being discussed:

a. Inventory – ending 2004, P30,000; ending 2005, P47,000 (by inventory count). Inventory of parts
17,000 Purchases 17,000

b. Depreciation – equipment (purchased at the beginning of 2004) cost, P80,000; estimated useful life,
10 years; manufacturer’s recommended value at end of 5 years, P10,000. Depreciation expense 7,000
Equipment 7,000

c. Unpaid wages at year-end 2004, P3,000; 2005, P11,000. Record when paid, because that is when the
wages requires the payment of resources and “it all events out anyway.” d. Note payable, P60,000, five-
year, 15%, interest payable each October 31; signed November 1, 2004. Interest expense 9,000 Cash
9,000 Because this is the correct amount of interest each year

e. Contract to deliver six electronic devices, signed October 15, 2005, pending assembly, P45,000. Due
from customers 45,000 Sales 45,000

f. Property taxes for 2005, billed in November 2005, payable without penalty up to February 15, 2004,
P9,000. Paid on February 14, 2006.

35

February 14, 2006: Property taxes 9,000 Cash 9,000

g. Advertising costs for December 2005, Christmas season, P17,000. Paid, within the 30day credit period,
on January 26, 2006.

January 26, 2006: Advertising 17,000 Cash 17,000 Questions: Based on the information given,
answer the following:
1. Interest expense of the P60,000 note at December 31, 2005 is a. P 10,500 b. P 9,000 c. P 7,500 d.
P 1,500

2. Interest payable at December 31, 2005 is a. P 9,000 b. P 7,500 c. P 1,500 d. P 750

3. Inventory at December 31, 2005 is a. P 64,000 c. P 30,000 b. P 47,000 d. Cannot be determined

4. Wages expense at December 31, 2005 is a. Understated by P 14,000 c. Understated by P 8,000 b.

Understated by P 11,000 d. Correctly stated

5. Accrued expenses at December 31, 2005 is understated by a. P 38,500 b. P 12,500 c. P 11,750 d. P

11,000

Solution 1. B P 60,000 x 15% = P 9,000 2. C P 60,000 x 15% x 2/12 = P 1,500 3. B Given in item A 4. C
Retained earnings 3,000 Wages expense 3,000 Wages expense 11,000 Wages payable 11,000 5. A
Interest payable 1,500 Wages payable 11,000 Property taxes 9,000 Advertising 17,000 Total
38,500

36
Problem 16 Branzuela Corporation reported the following amounts of net income for the years ended
December 31, 2003, 2004 and 2005:

2003 P127,000 2004 150,000 2005 128,500

You are performing the audit for the year ended December 31, 2005. During your examination, you
discover the following errors:

a. As a result of errors in the physical count, ending inventories were misstated as follows:

December 31, 2004 P14,000 understated December 31, 2005 P23,000 overstated

b. On December 29, 2005, Branzuela recorded as a purchase, merchandise in transit, which cost
P15,000. The merchandise was shipped FOB Destination and had not arrived by December 31. The
merchandise was not included in the ending inventory.

c. Branzuela records sales on the accrual basis but failed to record sales on account made near the end
of each year as follows

2003 P4,000 2004 5,000 2005 3,500

d. The company failed to record accrued office salaries as follows:

December 31, 2003 P10,000 December 31, 2004 14,000

e. On March 1, 2004, a 10% stock dividend was declared and distributed. The par value of the shares
amounted to P10,000 and market value was P13,000. the stock dividend was recorded as follows:

Miscellaneous expense P13,000 Common stock 10,000 Retained earnings 3,000

f. On July 1, 2004, Branzuela acquired a three-year insurance policy. The three-year premium of P6,000
was paid on that date, and the entire premium was recorded as insurance expense.
g. On January 1, 2005, Branzuela retired bonds with a book value of P120,000 for P106,000. The gain
was incorrectly deferred and is being amortized 10 years as a reduction of interest expense on other
outstanding obligations.

Questions:

1. What is the adjusted net income for the year ended December 31, 2003? a. P133,000 b. P121,000 c.
P117,000 d. P113,000

37

2. What is the adjusted net income for the year ended December 31, 2004? a. P159,000 b. P160,000
b. P179,000 c. P187,000

3. What is the adjusted net income for the year ended December 31, 2005? a. P129,600 b. P131,600 c.
P139,600 d. P142,600

4. What adjusting entry should be made on December 31, 2005 to correct the error described in item B?
a. Accounts payable 15,000 Purchases 15,000 b. Purchases 15,000 Accounts payable 15,000 c.
Accounts payable 15,000 Cash 15,000 d. Accounts payable 15,000 Retained earnings 15,000
5. The adjusting entry on December 31, 2004 to correct the error described in item E should include a
debit to a. Common stock P10,000 c. Additional paid in capital, P3,000 b. Retained earnings, P16,000
d. Miscellaneous expenses, P3,000

Solution 2003 2004 2005 Unadjusted Net Income 127,000 150,000 128,500 A
14,000 (14,000) (23,000) B 15,000 C 4,000 (4,000) 5,000 (5,000) 3,500 D (10,000) 10,000 (14,000)
14,000 E 13,000 F 5,000 (2,000) G 14,000 ___________ ___________ (1,400) Adjusted Net Income
121,000 179,000 129,600

Answer: 1. B 2. A 3. D 4. A 5. B