Problem 4
Prepare the pro-forma audit adjusting entries for the following errors discovered when examining the financial statements for the year 2021. The company uses the function of expense method in presenting the expenses. The enterprise has already set up its Cost of Goods Sold account. Answer the following items as follows:
1. Ending inventory in 2020 was understated because of non-inclusion of goods in the hands of consignees.
2. Ending inventory in 2021 was overstated due to double-counting of some items.
3. Purchase of goods made late in 2020 was recorded in 2021, but goods were counted in 2020 ending inventory.
4. Goods purchased at the end of 2021 were recorded when the goods were received in 2022. Goods were also omitted from ending inventory of 2021.
5. Merchandise bought on account and received in December 2020 was omitted from the inventory count made as of December 31, 2020. The purchase was properly recorded in 2020.
6. Sale of merchandise made in 2020 was recorded only in 2021.
Problem 5
The profit or loss section of the statement of comprehensive income of Dragon Ball Company for the years ended December 31, 2019, 2020, and 2021 indicates the following profit figures: P450,000 in 2019, P290,000 in 2020, and P440,000 in 2021.
An examination of the accounting records of the Dragon Ball Company for these years indicates that several errors were made in arriving at the profit amounts reported. The following errors were discovered:
1. Wages earned by workers but not paid at December 31, were consistently omitted from the records. The amounts omitted were:
December 31, 2019
P80,000
December 31, 2020
60,000
December 31, 2021
78,000
2. Unused office supplies were overlooked at the end of each year as follows:
2019
P32,000
2020
25,000
2021
22,400
3. Interest receivable in the amount of P18,000 was not recorded on December 31, 2020. Interest income was recorded when collected in 2021.
4. On January 2, 2019, a piece of equipment costing P42,000 was sold for P25,000. At the date of sale, the equipment had accumulated depreciation of P24,000. The cash received was recorded as Miscellaneous Income in 2019. In addition, depreciation was recorded for this equipment in 2019, 2020, and 2021 at the rate of 10% of cost.
5. Rental of 60.000 on an equipment, applicable for six months, was received on October 31, 2021. The entire amount was recorded as revenue upon receipt and no adjustment was made at the end of 2021.
REQUIRED:
* Prepare a schedule showing the corrected profit amounts for the years ended December 31, 2019, 2020, 2021. Each correction of the amount originally reported should be clearly labeled.
* Prepare audit adjusting entries to correct the 2021 financial statements.
* Assume that the books of Dragon Ball Company for 2021 have already been closed. Propose correcting entries in the books of Dragon Ball during the year 2022.
Problem 6
The first audit of the books of Erasure Company, a non-publicly accountable entity and qualifies as a small and medium-sized entity (SME), was made for the year ended December 31, 2021. In examining the books, the auditor found that certain items had been overlooked or incorrectly handled in the last three years. These items are as follows:
1. At the beginning of 2019, the company purchased a machine for P620,000 (salvage value of P60,000) that had a useful life of 6 years. The bookkeeper used straight-line depreciation, but failed to deduct the salvage value in computing the depreciation base for the three years 2019 - 2021.
2. At the end of 2020, the company failed to accrue sales salaries of P65,000. Salaries expense was charged when payment was made in 2021.
3. A lawsuit was filed against the Company in the year 2020. The decision was rendered by the court against the Company late in 2021, which involved payment to the plaintiff amounting to P585,000. Erasure charged this payment to the recorded liability of P450,000 accrued at December 31, 2020, and the balance to the retained earnings account.
4. Erasure Company purchased another company early in 2020 and recorded goodwill of P240,000. Erasure tested goodwill for impairment and found no objective evidence of impairment. Although the entity cannot reliably determine the useful life of goodwill, it amortized goodwill in 2020 and 2021 over a period of twenty years, crediting directly the goodwill account.
5. Sales for 2021 included amounts of P340,000 which had been received in cash during 2021, but for which the related goods costing P260,000 were shipped and delivered in 2022. Freight term is FOB shipping point.
6. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2020 and 2021. Repairs in the amount of P60,000 in 2020 and P50,000 in 2021 were so charged. The company applies a rate of 10% to the ending balance in the Equipment account in its determination of depreciation charges.
7. Erasure Company discovered errors in its inventory-taking procedures that have caused inventories for the last three years to be incorrect. Inventory at the end of 2019 was understated by P42,000; at the end of 2020 it was understated by P51,000; and at the end of 2021, it was overstated by P30,000.
8. An account payable of P153,000 for merchandise purchased in December 2020 was recorded in January 2021. The merchandise was not included in the physical inventory count on December 31, 2020.
REQUIRED:
* Prepare audit adjusting entries at December 31, 2021. Assume further that Erasure Company has already set up Cost of Sales in its books.