Answer Key – Correction of Errors

PROBLEM 2

Exercise 1 – Inventory Errors (Physical System)

A B C D E F
Income Statement - 2006
Purchases X X U U O O
Ending Inventory O U X U O X
Cost of sales U O U X X O
Net Income O U O X X U
Balance sheet - December 31, 2006
Inventory O U X U O X
Accounts Payable X X U U O O
Retained Earnings, before closing X X X X X X
Retained Earnings, after closing O U O X X U
Income Statement - 2007
Beginning inventory O U X U O X
Purchases X X O O U U
Ending Inventory X X X X X X
Cost of sales O U O X X U
Net Income U O U X X O
Balance sheet - December 31, 2007
Retained Earnings, before closing O U O X X U
Retained Earnings, after closing X X X X X X

Exercise 2 – Inventory Errors (Physical Inventory System)

G H I J
Income Statement - 2006
Sales X O U U
Ending Inventory U U O X
Cost of sales X O U X
Net Income X O U U
Balance sheet - December 31, 2006
Inventory X U O X
Accounts Receivable O O U U
Retained Earnings, before closing X X X X

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Answer Key – Correction of Errors

Retained Earnings, after closing O O U U

Income Statement - 2007
Beginning inventory X U O X
Sales U U O O
Ending Inventory X X X X
Cost of sales X U O X
Net Income U U O O
Balance sheet - December 31, 2007
Retained Earnings, before closing O O U U
Retained Earnings, after closing X X X X

PROBLEM 3 - DEPRECIATION

Exercise 1
Items 2006 2007 2008
Depreciation Expense for the year 8,000 12,000 (20,000)
Net income (8,000) (12,000) 20,000
Accumulated depreciation, year-end 8,000 20,000 -
Net book value, year-end (8,000) (20,000) -
Retained Earnings, before closing - (8,000) (20,000)
Retained Earnings, after closing (8,000) (20,000) -

Correcting Entries

200
6

Depreciation expense 8,000

Accumulated
depreciation 8,000

200
7 Depreciation expense 12,000

Retained earnings 8,000

Accumulated
depreciation 20,000

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Answer Key – Correction of Errors

200
8 Retained earnings 20,000
Accumulated
depreciation 20,000

Accumulated depreciation 200,000

Depreciation Expense 20,000

Exercise 2
Items 2006 2007 2008
Depreciation Expense for the year 24,000 24,000 24,000
Net income (24,000) (24,000) (24,000)
Accumulated depreciation, year-end 24,000 48,000 72,000
Net book value, year-end 24,000 (48,000) (72,000)
Retained Earnings, before closing - (24,000) (48,000)
Retained Earnings, after closing (24,000) (48,000) (72,000)

Correcting Entries

200
6

Depreciation expense 24,000 *

Accumulated depreciation 24,000

200
7 Depreciation expense 24,000

Retained earnings 24,000

Accumulated depreciation 48,000

200
8 Depreciation expense 24,000

Retained earnings 48,000

Accumulated depreciation 72,000

180,000/
* Depreciation reported 3 60000

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Answer Key – Correction of Errors

Should have been 180,000/

reported 5 36000
Annual correction 24000

Exercise 3
Items 2006 2007 2008
Depreciation Expense for the year 10,000 30,000 30,000
Net income (10,000) (30,000) (30,000)
Building 300,000 300,000 300,000
Accumulated depreciation, year-end 10,000 40,000 70,000
Net book value, year-end 290,000 260,000 230,000
Retained Earnings, before closing - (10,000) (40,000)
Retained Earnings, after closing (10,000) (40,000) (70,000)

Correcting Entries

200
6
Building 300,000
Donated capital 300,000

Depreciation expense 10,000 *

Accumulated depreciation 10,000

200
7 Building 300,000
Donated capital 300,000

Depreciation expense 30,000

Retained earnings 10,000
Accumulated depreciation 40,000

200
8 Building 300,000
Donated capital 300,000

Depreciation expense 30,000

Retained earnings 40,000
Accumulated depreciation 70,000

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Answer Key – Correction of Errors

* Depreciation reported -
Should have been
reported 300,000/10 30,000

Annual correction (30,000)

Exercise 4
Items 2006 2007 2008
Repairs Expense (75,000) - -
Depreciation Expense for the year 15,000 15,000 15,000
Net income 60,000 (15,000) (15,000)
Machinery 75,000 75,000 75,000
Accumulated depreciation, year-end 15,000 3,000 45,000
Net book value, year-end 60,000 45,000 30,000
Retained Earnings, before closing - 60,000 45,000
Retained Earnings, after closing 60,000 45,000 30,000

Correcting Entries

200
6
Building 75,000
Repairs Expense 75,000

Depreciation expense 15,000 *

Accumulated depreciation 15,000

200
7 Building 300,000
Retained earnings 300,000

Depreciation expense 15,000

Retained earnings 15,000
Accumulated depreciation 30,000

200
8 Building 300,000
Retained earnings 300,000

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Answer Key – Correction of Errors

Depreciation expense 15,000

Retained earnings 30,000
Accumulated depreciation 45,000

* Depreciation reported -
Should have been
reported 75000/5 15,000

Annual correction (15,000)

Exercise 5
Items 2006 2007 2008
Repairs Expense 9,000 - -
Depreciation Expense for the year (3,000) (3,000) (3,000)
Net income (6,000) 3,000 3,000
Machinery (9,000) (9,000) (9,000)
Accumulated depreciation, year-end (3,000) (6,000) (9,000)
Net book value, year-end (6,000) (3,000) -
Retained Earnings, before closing - (6,000) (3,000)
Retained Earnings, after closing (6,000) (3,000) -

Correcting Entries

200
6

Repairs expense 9,000

Machinery 9,000

Accumulated depreciation 3,000 *

Depreciation
expense 3,000

200
7 Retained Earnings 9,000
Machinery 9,000

Accumulated depreciation

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Answer Key – Correction of Errors

6,000
Depreciation
expense 3,000
Retained earnings 3,000

200
8 Retained Earnings 9,000
Machinery 9,000

Accumulated depreciation 9,000

Depreciation
expense 3,000
Retained earnings 6,000

* Depreciation reported 9000/3 3,000

Should have been reported -

Annual correction 3,000

PROBLEM 4

1. A
2. A
3. B

Net Income Retained Earnings Working Capital

2006 2007 2007 2007

Ending Inventory -2006 1,000 (1,000) - -

-2007 (3,000) (3,000) (3,000)

Depreciation expense -2006 (800) (800) -

-2007 2,500 2,500 -
Understatements(Over
) 200 (1,500) (1,300) (3,000)

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Answer Key – Correction of Errors

PROBLEM 5

1. B
2. C
Net Income
2007 2008

Unadjusted Net Income P 55,000 P 70,000

Ending Inventory 2007 (2,900) 2,900

2008 (3,300)

Depreciation 2007 (1,500) -

2008 (1,500)

Commission receivable 2007 2,200 (2,200)

2008 1,800

Purchases 2007 (6,000) 6,000

2008

Adjusted Net Income P 46,800 P 73,700

PROBLEM 6

1. B
2. D

Net Income
2006 2007

Prepaid insurance P 5,000 P (5,000)

Ending Inventory (20,000) 20,000
Depreciation expense (35,000) -

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Answer Key – Correction of Errors

Cost of goods sold - -

(Over)
Understatement P (50,000) P 15,000

Correcting Entry
Insurance
Expense 5,000
Retained earnings 15,000
Inventories 20,000

PROBLEM 7

1. A
2. C
3. B

2005 2006 2007

Unadjusted net income P 120,000 P 185,000 P 150,000

Accrued interest 2005 10,000 (10,000)

2006 14,000 (14,000)
2007 16,000

Merchandise inventory 2006 (9,000) 9,000

Unexpired insurance 2007 12,000 (12,000)

Accrued utilities 2005 (2,000) 2,000

Depreciation of
equipment 2006 4,000
2007 4,000

Sale of equipment 2006 (13,000)

(3,000)

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Answer Key – Correction of Errors

Adjusted net income P 128,000 P 182,000 P 153,000

Entry made for sale:

Cash 13000
Income from sale 13000

Should have been entry:

Cash 13000
Accumulated depreciation 24000
Loss on sale of equipment 3000
Equipment 40000

Loss on sale of equipment 3000

Recorded income from sale 13000
Overstatement of net income 16000

PROBLEM 8

1. B
2. A
3. D 0r P310,900

Net Income Retained Earnings

2007 2008 2007
Unadjusted net income P 256,700 P 320,000 P
2007 Errors:

Inventories 5,000 (5,000) -

Accrued utilities (2,500) 2,500 -

Repairs (3,200) (3,200)

Bad debts (6,000) (6,000)

2008 errors
Repairs (10,000) (10,000)
Depreciation on furniture and
equipment 1,000 1,000

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Answer Key – Correction of Errors

Write-off of accounts receivable - 4,000

Commission's expense 2,400 2,400

Adjusted net income P 250,000 P 310,900 P (11,800)

PROBLEM 9

Typographical error for additional information:

There should have been item 9 stating that November 30, 2006 inventory was understated by P16,000.

1. D
2. A

Net Income Total Assets

2007 2007

1 Unadjusted balance P 450,000 P

2 Accounts Payable (8,000)

3 Bad debts expense (35,000) (35,000)
4
5

6 Depreciation of machinery (2,400) (2,400)

Research and
7 development (150,000) (150,000)
Amortization 30,000 30,000
8
9 Inventory (16,000)
Adjusted balances P 268,600 P (157,400)

PROBLEM 10

1. A
2. A
3. A
4. C

Net Income Working Retained

Capital Earnings
2007 2008 2008 2008

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 Answer Key – Correction of Errors

2007 Errors

Ending inventory P (40,000) P 40,000 P P

Accrued salaries (28,000) 28,000

Depreciation (10,000) (10,000)

Prepaid insurance 30,000 (30,000)

Bad debts (5,000) (5,000) (5,000)

2008 Errors

Ending inventory 20,000 20,000 20,000

Depreciation 16,000 16,000

Sale of machinery 24,000 24,000 24,000

Adjustments P (53,000) P 98,000 P 39,000 P 45,000

PROBLEM 11

1. A
2. C
3. A
4. D
5. A
Net Income WC SHE
2004 2005 2006 2007 2007 2007

Unadjusted balance P P 7,500 P 6,500 P 5,500 P P 87,000

2004 Errors
Inventory 6,000 (6,000)

Depreciation expense (250) (250)

Prepaid insurance 900 (900)

Accrued income (200) 200

2005 Errors
Inventory (7,000) 7,000
Depreciation expense

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Answer Key – Correction of Errors

(500) (500)

Prepaid insurance 700 (700)

Unearned income (400) 400

Accrued income (75) 75

2006 Errors
Inventory (8,000) 8,000

Depreciation expense (150) (150)

Prepaid insurance 500 (500)

Accrued income (100) 100

2007 Errors
Inventory 9,000 9,000 9,000

Depreciation expense (350) (350)

Prepaid insurance 600 600 600

Unearned income (300) (300) (300)

Accrued income (50) (50) (50)

P 6,450 P (6,475) P 5,525 P 22,000 P 9,250 P 95,000

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