PROBLEM 1

In line with your examination of Wisdom Inc. financial statements the company accountant presented to you the balance
sheet that follows. You reviewed the client’s accounting records and books based thereon. You discovered that books of
accounts are in agreement the said balance sheet as presented below:

Wisdom Inc.
Statement of Financial Position
December 31, 2014
ASSETS LIABILITIES AND OWNERS EQUITY
Cash P 80,000 Accounts Payable P 32,000
Accounts Receivable 160,000 Notes Payable 64,000
Notes Receivable 48,000 Capital Stock 160,000
Inventories 400,000 Retained Earnings 432,000
Total P688,000 Total P688,000

Audit notes:
a. Further review and investigation of the company’s books revealed the following omissions and errors which were
not corrected during the year of errors.
2011 2012 2013 2014
Deferred Expense/Prepaid Expense P14,400 P11,200 P8,000 P9,600
Deferred Income/Unearned Income 6,400 4,800
Accrued Expense 3,200 1,200 1,600 800
Accrued Income 2,000 2,400
Ending Inventory-Overstated 112,000 128,000
Ending Inventory-Understated 96,000 144,000
b. A P50,000 routinary repair cost incurred on its equipment at the beginning of 2011 was charged to the
equipment account and was depreciated using straight-line method over the remaining useful life of the
equipment which was 5 years.
c. A P90,000 major repair cost which enhanced the production capacity of one of its equipment at the beginning of
2013 was charged to repairs expense. Remaining useful life of the related production equipment was 3 years.
d. No dividends were declared during the years 2011 to 2014 and no adjustments were made to retained earnings.
The company’s books reported the following net income:
Year 2011 2012 2013 2014
Net Income P120,000 P88,000 P104,000 P120,000

Considering the above findings, determine the adjusted amounts of the following: (Disregard tax implications)
ANSWERS:
1. Net income (loss) in 2011 __________________________________
2. Net income (loss) in 2012 __________________________________
3. Net income (loss) in 2013 __________________________________
4. Net income (loss) in 2014 __________________________________
5. Net adjustment to retained earnings as of January 1, 2014 __________________________________
6. Net adjustment to working capital as of December 31, 2014 __________________________________

PROBLEM 2

GRACE Company reports on a calendar-year basis. Its 2013 and 2014 financial statements contained the
following errors:

2013 2014
Over(under)statement of ending inventory (100,000) 40,000
Depreciation understatement 40,000 60,000
Failure to accrue salaries at year-end 80,000 120,000

QUESTIONS:
a) How much should the 2014 net income increase/decrease as a result of correcting these errors?
b) What should be the adjustment in 2013 net income? Indicate if it is an addition or a deduction.
c) What is the net effect of these errors to the 2013 and 2014 working capital?
PROBLEM 3

BRAVE Company failed to recognized accruals and prepayments since the inception of the business this year. The
earnings before tax of the company during the current year is P1,400,000. Other information pertaining to the
unrecognized amounts are as follows:

Prepaid Insurance 20,000

Deferred Rent Revenue 30,000
Interest Receivable 50,000
Depreciation Expense 5,000

QUESTIONS:
a) How much should be the corrected net income of the company? Assume a tax rate of 30%.
b) If the same errors are discovered in the succeeding year, by how much should the net income of that period be
adjusted? Ignore income taxes.

THE BRICKS OF LIFE

You say: “It’s impossible.”

God says: ALL THINGS ARE POSSIBLE. (Luke 18:27)

You say: “I’m too tired.”

God says: I WILL GIVE YOU REST. (Matt 11: 28-30)

You say: “Nobody really loves me.”

God says: I LOVE YOU. (John 3:16 & 13:34)

You say: “I can’t go on.”

God says: MY GRACE IS SUFFICIENT. (II Cor 12:9 & Psalm 91:15)

You say: “I can’t figure things out.”

God says: I WILL DIRECT YOUR STEPS. (Prov 3:5-6)

You say: “I can’t do it.”

God says: YOU CAN DO ALL THINGS. (Phil 4:13)

You say: “I’m not able.”

God says: I AM ABLE. (II Cor 9:8)

You say: “It’s not worth it.”

God says: IT WILL BE WORTH IT. (Rom 8:28)