GUIDELINES Books are open 1.
. If the error is already counterbalanced and the company is in the second year, an entry is necessary to correct the current period and to adjust the beginning balance of the Retained earnings. 2. If the error is not yet counterbalanced, an entry is necessary to adjust the beginning balance of the Retained earnings and correct the current period. Books are closed 1. If the error is already counterbalanced, no entry is necessary. 2. If the error is not yet counterbalanced, an entry is necessary to adjust the present balance of the Retained earnings. b. Non Counter Balancing Errors Errors which take longer than two periods to correct themselves. This type of error is carried over to the subsequent accounting period until corrected or until the balance sheet item involved is removed from the accounts by sales, retirement or other means of disposal.
GUIDELINES IN ERROR ANALYSIS 1. What accounts are affected? 2. How were these accounts affected? Was there an understatement or an overstatement? 3. What was the erroneous entry made or what was the entry omitted? 4. What is the correct entry? 5. What is the necessary adjusting or correcting entry? END
PROBLEM 1 In your examination of the financial statements of GRISHAM CORP., for the year ended December 31, 2004, you discovered the following errors. Prepare the necessary adjusting entries. 1. Interest collection from a notes receivable amounting to P3,500 which was received on December 30, 2004 was deposited and recorded on the same day by a credit to sales. 2. A staled check of P12,000 which had been outstanding for more than six months was included in the list of outstanding checks. This was in payment of Accounts Payable 3. Payment of P4,500 for freight charges on merchandise purchased on December 18, 2004 was debited to freight out account. 4. On December 31, 2003, the physical count was overstated by P5,000. 5. Improvements on building of P100,000 had been charged to expense on January 01, 2004. Improvements have a life of 5 years. 6. GRISHAM CORP. issued 5,000 shares of P 100 par value capital stock for P550,000 on January 14, 2003. The proceeds were credited to the Capital Stock account.
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On January 01, 2004, an equipment costing P70,000 was sold for P35,000. At the date of sale, the equipment has an accumulated depreciation of P43,750. The cash received was recorded as other income in 2004. A P15,000 collection from Smart Co. was correctly recorded in the general ledger but was erroneously credited to the subsidiary ledger account of Smurf Corp. Insurance premium of P45,000 for three years paid in January 2003 was charged to expenses in 2003. On December 31, 2003, goodwill estimated by the Board of Directors at P300,000 was set up by a credit to Retained Earnings. On December 29, 2004, GRISHAM CORP. issued checks to its creditors amounting to P75,000. These checks were released on January 4, 2005. A check for P20,000 from a customer to apply to his account was received on December 30, 2004 but was not recorded until January 4, 2005. A customer's deposit of P60,000 for goods to be delivered in January 2005 was deducted from accounts receivable. A check was cleared by the bank as P5,200 on December 05, 2003, but was recorded by the bookkeeper as P2,500. This was in payment of an employee cash advance. On the last day of 2004, the company received a P90,000 prepayment from a tenant for 2005 rent of a building. It was recorded as rent revenue.
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