PROBLEM 1 While preparing the financial statements of Nick Corporation for the year 2020, the accountant noted that there were some errors and omissions in the books of the company on December 31, 2019. There were neither additional errors nor omissions at the end of December 31, 2020. The items that the accountant failed to adjust in 2019 are: 1) Merchandise in transit to the company was lost. Term: FOB destination. Invoice amount is P20,000. 2) Accrued office salaries, P1,000. 3) Supplies used, P200. Supplies, an asset account, was charged for supplies purchased. 4) Prepaid rent, P250. Rent expense account was debited for rental payments. 5) Accrued interest on notes receivable, P50. 6) Dividends declared, P25,000. 7) Accrued miscellaneous expenses, P100. However, checks to pay them were prepared on January 2, 2020; these checks were antedated on December 29, 2019. 8) Bank charges for December 2019, P25. 9) Merchandise inventory on hand was valued at P1,000 instead of P2,000. 10) Advance payment of a customer, P5,000. The payment was credited to accounts receivable. Required: a) What effects does each omission have on the net income of 2019? b) Using the same information stated above, what effect does each omission have on the net income of 2020?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
PROBLEM 1
While preparing the financial statements of Nick Corporation for the year 2020, the accountant noted that there were some errors and omissions in the books of the company on December 31, 2019. There were neither additional errors nor omissions at the end of December 31, 2020.
The items that the accountant failed to adjust in 2019 are:
1) Merchandise in transit to the company was lost. Term: FOB destination. Invoice amount is P20,000.
2) Accrued office salaries, P1,000.
3) Supplies used, P200. Supplies, an asset account, was charged for supplies purchased.
4) Prepaid rent, P250. Rent expense account was debited for rental payments.
5) Accrued interest on notes receivable, P50.
6) Dividends declared, P25,000.
7) Accrued miscellaneous expenses, P100. However, checks to pay them were prepared on January 2, 2020; these checks were antedated on December 29, 2019.
8) Bank charges for December 2019, P25.
9) Merchandise inventory on hand was valued at P1,000 instead of P2,000.
10) Advance payment of a customer, P5,000. The payment was credited to accounts receivable.
Required:
a) What effects does each omission have on the net income of 2019?
b) Using the same information stated above, what effect does each omission have on the net income of 2020?
Problem 2
After completing the
1) Depreciation computed on the building for the years 2018, 2019 and 2020 were overstated by P10,000 per year.
2) Cost of the minor repair on the machinery of P1,200, made on June 30, 2019, was charged to Machinery account. Machinery balance is depreciated at an annual rate of 10%.
3) Unused office supplies as of December 31, 2019 of P1,250 were overlooked. The company debits Office supplies expense upon purchase of supplies.
4) 3-year insurance premium of P12,000 was paid on October 1, 2018. The amount was charged to Insurance expense account and no adjustment for the unexpired premium was taken up.
BSA 2201 – Intermediate Accounting 3 LEC07C – Correction of Errors
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5) Merchandise purchased on 2019 of P32,000, term: FOB shipping point, was taken up in the books when the goods were received in January 2020. These items were not included in the inventory count made on December 31, 2019.
6) Merchandise sale of P45,000 was delivered in 2019 and was recorded in January 2020.
7) The delivery expense of P1,800 incurred on October 1, 2020 was debited to Delivery equipment account. Delivery equipment is depreciated at an annual rate of 12%.
8) Accrued rent expenses of P12,000 were not taken up at the end of 2019.
Required:
a) Working paper for the correction of the account balances as of December 31, 2020.
b) Correcting entries as of December 31, 2020.
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