Single Entry & Errors

Auditing Problems

CASH TO ACCRUAL BASIS, SINGLE ENTRY AND CORRECTION OF ERRORS PROBLEM NO. 1 Your audit of Camiguin Company disclosed that your client kept very limited records. Purchases of merchandise were paid for by check, but most other items were out of cash receipts. The company’s collections were deposited weekly. No record was kept of cash in the bank, nor was a record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and this copy was given to the customer when he paid his account. On January 2, 2015 started business and issued common stock, 108,000 shares with P100 par, for the following considerations: Cash Building (useful life, 15 years) Land

P

900,000 8,100,000 2,700,000 P11,700,000

An analysis of the bank statements showed total deposits, including the original cash investment, of P6,300,000. The balance in the bank statement on December 31, 2015, was P450,000, but there were checks amounting to P90,000 dated in December but not paid by the bank until January 2016. Cash on hand on December 31, 2015 was P225,000 including customers’ deposit of P135,000. During the year, Camiguin Company borrowed P900,000 from the bank and repaid P225,000 and P45,000 interest. Disbursements paid in cash during the year were as follows: Utilities Salaries Supplies Dividends

P180,000 180,000 360,000 270,000 P990,000

An inventory of merchandise taken on December 31, 2015 showed P1,359,000 of merchandise. Tickets for accounts receivable totaled P1,620,000 but P90,000 of that amount may prove uncollectible. Unpaid suppliers invoices for merchandise amounted to P630,000. Equipment with a cash price of P720,000 was purchased in early January on a one-year installment basis. During the year, checks for the down payment and all maturing installments totaled P801,000. The equipment has a useful life of 5 years. Based on the above and the result of your audit, determine the following: (Disregard income taxes) 1. Payments for merchandise purchases in 2015 2. Collections from sales in 2015 3. Net income for the year ended December 31, 2015 4. Stockholders’ equity as of December 31, 2015 5. Total assets as of December 31, 2015 PROBLEM NO. 2 Misamis Company’s December 31, year end financial statement contained the following errors: Ending inventory Depreciation expense

December 31,2014 December 31,2015 P100,000 understated P90,000 overstated 20,000 understated 1

Auditing Problems

An insurance premium of P75,000 was prepaid in 2014 covering the years 2014, 2015, and 2016. The same was charged to expense in full in 2014. In addition, on December 31, 2015, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2016. There were no other errors during 2014, 2015 and 2016 and no corrections have been made for any of the errors. Ignore income tax considerations. Based on the above and the result of your audit, answer the following: 1. What is the total effect of the errors on the 2014 net income? 2. What is the total effect of the errors on the 2015 net income? 3. What is the total effect of the errors on the company’s working capital at December 31, 2015? 4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2015? 5. What is the total effect of the errors on the company’s working capital at December 31, 2016? PROBLEM NO. 3 You were engaged by Lanao Company to audit its financial statements for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end of 2014 and 2015. You also discovered that other items had been improperly recorded. These omissions and

other failures for each year are summarized below: Salaries payable Interest receivable Prepaid insurance Advances from customers (Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year) Machinery (Capital expenditures had been recorded as repairs but should have been charged to Machinery; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%)

12/31/15 12/31/14 P780,000 P873,600 213,000 259,200 307,800 384,000 561,000

470,400

522,000

564,000

Based on the above and the result of your audit, answer the following: 1. What is the total effect of the errors on the 2014 net income? 2. What is the total effect of the errors on the 2015 net income? 3. What is the total effect of the errors on the company’s working capital at December 31, 2015? 4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2015? PROBLEM NO. 4 The Davao Company engaged you in 2015 to examine its books and records and to make whatever adjustments are necessary. Your examination disclosed following: a. Prior to any adjustments, the Retained Earnings account is reproduced below: RETAINED EARNINGS Date 2013 Jan. 1 Dec. 31 2014 Jan. 31 Apr. 3 Aug. 30 Dec. 31

Particulars

Debit

Balance Net income for the year Dividends paid Paid in capital in excess of par Gain on retirement of preferred stock at less than issue price Net loss for the year

140,000

205,000

Credit

Balance

310,000

P580,000 890,000

90,000 64,500

750,000 840,000 904,500 699,500 2

Auditing Problems

2015 Jan. 31 Dec. 31

Dividends paid Net loss for the year

b. The company failed to properly recognize accruals and prepayments.

100,000 165,500

599,500 P434,000

Selected accounts revealed the

following information: 1. 2. 3. 4.

Prepaid expenses Accrued expenses Unearned income Accrued income

2012 2013 2014 2015 P8,500 P6,200 P7,400 P9,500 5,400 7,300 8,700 9,000 6,900 7,800 8,900 9,600 4,700 5,600 6,200 7,800

c. Dividends had been declared on December 31 in 2013 and 2014 but had not been entered in the books until paid. d. The company purchased a machine worth P270,000 on April 30, 2012. The company charged the purchase to expense. The machine has an estimated useful life of 3 years. The company uses the straight line method and residual values are deemed immaterial. e. The company received a transportation equipment as donation from one of its stockholders on September 30, 2014. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred for registering the transfer of ownership. The company did not record the donation on its books. The expenses paid related to the donated equipment were charged to expense. f. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the end of 2013 and 2015, respectively. g. The merchandise inventories at the end of 2014 and 2015 did not include merchandise that was then in transit shipped FOB shipping point. These shipments of P43,400 and P32,600 were recorded as purchases in January 2015 and 2016, respectively. Based on the above audit findings, the adjusted balances of the following are: (Disregard tax implications) 1. Retained earnings, 12/31/12 2. Net income for 2013 3. Retained earnings, 12/31/13 4. Net loss for 2014 5. Retained earnings, 12/31/14 6. Net loss for 2015 7. Retained earnings, 12/31/15

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