Chapter 41
Error Correction
Problem 41-1
During the course of an audit of the financial statements of Julie Company for the year ended
December 31, 2023, the following data are discovered:
Inventory on January 1, 2023 had been overstated by P300,000.
Inventory on December 31, 2023 was understated by P500,000.
An insurance policy covering three years had been purchased on January 1, 2022 for
P150,000. The entire amount was charged as an expense in 2022.
During 2023, the entity received a P100,000 cash advance from a customer for merchandise to
be shipped during 2024. The amount had been credited to sales revenue. The gross income on
sales is 50%.
Net income per book was P2,000,000.
What amount should be reported as corrected net income for the current year?
Problem 41-2
Malampaya Company showed income before income tax of P6,500,000 on December 31, 2023.
The year-end verification of the transactions revealed the following errors:
*P1,000,000 worth of merchandise was purchased in 2023 and included in the ending
inventory. However, the purchase was recorded only in 2024.
*A merchandise shipment valued at P1,500,000 was properly recorded as purchase at
year-end.
Since the merchandise was still at the port area, it was inadvertently omitted from the
inventory balance on December 31, 2023.
*Advertising for December 2023 amounting to P500,000 was recorded when payment
was made in January 2024.
*Rental of P300,000 applicable for six months was received on November 1, 2023. The
entire amount was reported as income in 2023.
*Insurance premium covering the period from July 1, 2023 to June 30, 2024 amounting
to P200,000 was paid and recorded as expense on July 1, 2023. The entity did not make
any adjustment at the end of the year.
What amount should be reported as corrected pretax income for 2023?
Problem 41-3
Henson Company had determined the 2023 and 2024 net income to be P4,000,000 and
P5,000,000, respectively.
In a first time audit of the financial statements, the following errors are discovered:
Merchandise inventory was incorrectly determined – P50,000 overstatement for 2023 and
P150,000 overstatement for 2024.
Revenue received in advance in 2023 of P300,000 was credited to a revenue account
when received. Of the total, P50,000 was earned in 2023, P200,000 was earned in 2024
and the remainder will be earned in 2025.
P400,000 gain on sale of equipment in 2024 was erroneously credited to retained
earnings.
1. What amount should be reported as net income for 2023?
2. What amount should be reported as net income for 2024?
Problem 41-4
Emerald Company reported net income for 2023 at P1,550,000 before any adjustments. Upon
inspection of the records, the following facts were discovered for the year ended December 31,
2023:
A fire insurance premium of P40,000 was paid and charged as insurance expense for
2023. The fire insurance policy covers one year from April 1, 2023.
Inventory on January 1, 2023 was understated by P80,000.
Inventory on December 31, 2023 was understated by P120,000.
Taxes of P60,000 for the fourth quarter of 2023 were paid on January 20, 2024 and
charged as expense of 2024.
On December 5, 2023 a cash advance of P100,000 by a customer was received for goods
to be delivered in January, 2024. The amount of P100,000 was credited to sales revenue.
What amount should be reported as net income for 2023?
Problem 41-5
Atlanta Company reported net income for 2023 P4,000,000 and 2024 P5,000,000. An audit
revealed certain errors.
A collection of P100,000 from a customer was received on December 29, 2024 but not recorded
until January 4, 2025.
Supplier’s invoice on account of P160,000 for inventory received in December 2024 was not
recorded until January 2025. Inventories on December 31, 2023 and 2024 were correctly stated.
In September 2024, a P20,000 invoice for supplies was charged to purchases. Office supplies are
expensed when incurred.
Sales on account of P300,000 in December 2024 were recorded in 2025. Depreciation for 2023
was understated by P90,000.
1. What amount should be reported as net income for 2023?
2. What amount should be reported as net income for 2024?
Problem 41-6
Tower Company started operations at the beginning of current year. The entity failed to
recognize accruals and prepayments at the end of reporting period. The income before tax,
accrual and prepayments at the end of the current year are:
Income before tax 1,400,000
Prepaid insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000
What amount should be reported as corrected income before tax?
Problem 41-7
On December 31, 2023, Astor Company sold merchandise for P750,000 to Day Company. The
terms of the sale were net 30, FOB shipping point.
The merchandise was shipped on December 31, 2023 and arrived at Day Company on January 5,
2024.
Due to a clerical error, the sale was not recorded until January 2024 and the merchandise sold at
a 25% markup on cost was included in inventory on December 31, 2023.
What was the effect of the errors on cost of goods sold for 2023?
Problem 41-8
Bren Company’s beginning inventory on January 1 was understated by P200,000 and the ending
inventory was overstated by P600,000.
What was the effect of the errors on the cost of goods sold for the current year?
Problem 41-9
On January 1, 2023, Conn Company reported retained earnings of P4,000,000. In 2023, the
entity determined that insurance premiums of P900,000 for the three-year period beginning
January 1, 2022 had been paid and fully expensed in 2022. The income tax rate is 25%.
What amount should be reported as corrected retained earnings on January 1, 2023?
Problem 41-10
After the issuance of the 2023 financial statements, Terry Company discovered a computation
error of P150,000 overstatement in the cost of goods sold for the year ended December 31, 2023.
In October 2024, the entity paid P500,000 in settlement of litigation instituted against it during
2023.
In the 2024 financial statements, the December 31, 2023 retained earnings balance as previously
reported should be adjusted by what amount before tax?