AC 306

TF 12:30 - 3:30
CHARLIE MAGNE G. SANTIAGUEL MR. GEODINO P. COSTA
3 - BSA

ERROR CORRECTION

1. All of the following involve counterbalancing errors, except:
a. Failure to record prepaid expenses
b. Failure to record depreciation
c. Understatement of ending inventory
d. Overstatement of purchases

All of the options involve counterbalancing errors except the failure to record depreciation

2. Cooper Inc. took physical inventory at the end of 2010. Purchases that were acquired FOB
destination were in transit, so they were not included in the physical count.
a. Cooper needs to correct an accounting error.
b. Cooper has made a change in accounting principle, requiring retrospective adjustment.
c. Cooper is required to adjust a change in accounting estimate prospectively.
d. Cooper is not required to make any accounting adjustments.

This inventory should be excluded because it had not yet reached its destination, where title
passes.

3. During 2014, P Company discovered that the ending inventories reported on its financial
statements were incorrect by the following amounts:

2012 $120,000 understated
2013 150,000 overstated

P uses the periodic inventory system to ascertain year-end quantities that are converted to dollar
amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring
income taxes, P's retained earnings at January 1, 2014 would be:
a. correct.
b. $30,000 overstated
c. $150,000 overstated
d. $150,000 understated

The $120,000 understated ending inventory would cause the 2009 COGS to be overstated,
understating NI and RE. That same error would cause 2010 beginning inventory to be
understated, overstating NI and RE by the same amount, effectively correcting the RE balance.
The $150,000 overstated ending inventory would cause the 2010 COGS to be understated,
overstating NI and RE.

4. C Co. reported a retained earnings balance of $200,000 at December 31, 2010. In September
2011, C determined that insurance premiums of $30,000 for the three-year period beginning
January 1, 2010, had been paid and fully expensed in 2010. C has a 30% income tax rate. What
amount should C report as adjusted beginning retained earnings in its 2011 statement of retained
earnings?
a. $210,000.
b. $214,000.
c. $220,000.
d. $221,000.

The insurance premiums of $30,000 were charged in error to insurance expense on the 2010
income statements. The premiums should have been allocated equally at $10,000 per year for
2010, 2011, and 2012. Therefore, the beginning retained earnings at 2011 are understated by
$14,000the effect of the error ($20,000) less the $6,000 tax effect ($20,000 30%). The
corrected retained earnings would be the beginning balance plus the correction of the error
($200,000 + 14,000 = $214,000).

5. Moonland Companys income statement contained the following errors:
Ending inventory on December 31, 2014 is understated by $6,000
Depreciation expense for 2014 is overstated by $1,000
What is the effect of the errors on 2011 net income before taxes?
a. Overstated by $5,000
b. understated by $5,000
c. understated by $7,000
d. overstated by $7,000

Cost of goods sold overstated $6,000
Depreciation expense overstated 1,000
Net understatement of net income $7,000

6. Popeye Company purchased a machine for $300,000 on January 1, 2010. Popeye depreciates
machines of this type by the straight-line method over a five-year period using no salvage value.
Due to an error, no depreciation was taken on this machine in 2010. Popeye discovered the error
in 2011. What amount should Popeye record as depreciation expense for 2011? The tax rate is
40%.
a. $120,000.
b. $60,000.
c. $36,000.
d. $72,000.

$300,000/5 = $60,000
Only one year of depreciation is expensed in the income statement. The error correction would
be recorded as a prior period adjustment.

7. Powell Company had the following errors over the last two years:2009: Ending inventory was
overstated by $30,000 while depreciation expense was overstated by $24,000.2010: Ending
inventory was understated by $5,000 while depreciation expense was understated by $4,000.By
how much should retained earnings be adjusted on January 1, 2011? (Ignore taxes)
a. Increase by $15,000.
b. Decrease by $25,000.
c. Decrease by $6,000.
d. Increase by $25,000

2009 Depreciation overstated $24,000
2010 EI understated 5,000
2010 Depreciation understated (4,000)
Net effect on RE $25,000

8. If an inventory account is understated at year-end, the effect is to:
a. overstate the net purchases
b. overstate the gross margin
c. overstate the goods available for sale
d. overstate the cost of goods sold

An understatement in ending inventory would result in an overstate to cost of goods sold

9. An insurance premium was acquired during the year which was then debited to prepaid
insurance. At year-end, the bookkeeper forgot to record the necessary adjustments. What is the
effect of the error? (choose the incorrect one)
a. Working capital is overstated
b. Net income is overstated
c. Net income is understated
d. The omission shall have no effect

The omission made is to record the expiration of the insurance which understates the expenses,
which would overstate the income

10. Which of the following would not correct themselves in the next year?
a. Accrued expense not recognized at year-end
b. Accrued revenue not recognized at year-end
c. Depreciation expense overstated for the year
d. Prepaid expense not recognized at year-end

Errors on depreciation are noncounterbalancing errors.
11. Failure to record accrual for salaries at year-end would result to:
a. overstated liabilities
b. overstated net income
c. understated retained earnings
d. none of the above

The omission would result to an understatement in expenses which would overstate the income

12. In 2014, due to a change in marketing forecasts, Barney Corporation reduced the projected
life of its patent for producing round dice. The cumulative patent amortization prior to 2014
would have been $10 million higher had the new life been used. Barney's tax rate is 30%.
Barney's retained earnings as of December 31, 2014, would be:
a. Overstated by $7 million.
b. Overstated by $3 million.
c. Overstated by $10 million.
d. Unaffected.

This is a change in estimate not an error. No prior period adjustment is needed.

13. Due to an error in computing depreciation expense, Crote Corporation understated
accumulated depreciation by $60 million as of December 31, 2014. Crote has a tax rate of 40%.
Crote's retained earnings as of December 31, 2014, would be:
a. Overstated by $36 million.
b. Understated by $36 million.
c. Overstated by $24 million.
d. Understated by $24 million.

Retained Earnings $36,000,000
Deferred Tax Liability 24,000,000
Accumulated Depreciation $60,000,000

14. During 2014, A.J. Company acquired an insurance premium which covers a two-year period.
This was debited to insurance expense. At year-end, the bookkeeper forgot to record the
necessary adjustments. What would be the effect of the error to the 2014 net income, 2014
working capital, 2015 net income and 2015 retained earnings?
2014
Net Income
2014
Working Capital
2015
Net Income
2015
Retained Earnings
a. Understate Understate Understate No effect
b. Overstate Overstate Understate No effect
c. Understate Understate Overstate No effect
d. Understate Overstate Understate No effect

The necessary adjustment would recognize a current asset on the companys books, thus,
understating the working capital. The net income for 2014 would be understated because
expenses are overstated which would then overstate the income for 2015, thus, having the same
effect on retained earnings as if the error had been corrected.

15. Triple A Company overstated its depreciation expense by $500,250 in 2013. This error was
discovered in 2015. Which of the following statements is correct?
a. The error should not be corrected because it is a counterbalancing error.
b. The error is a noncounterbalancing error and no entry should be made.
c. The error is a noncounterbalancing error and the entry would have a credit to retained earnings
d. The error is a noncounterbalancing error and the entry would have a debit to retained
earnings

The error is a non-counterbalancing error and it should be corrected because they would not
correct themselves. The entry would be:
Retained Earnings $500,250
Accumulated Depreciation $500,250

During 2014, T.H.E. Company discovered the following errors on its books:

1. Purchases on account on December 31 of $350,000 were credited to accounts receivable.
This was excluded from ending inventory.
2. Prepaid insurance expired for the period of $12,000 had been debited to maintenance
expense.

16. Regarding transaction 1, which of the following is incorrect?
a. The error would understate net income for 2014
b. The error would understate net income for 2015
c. The error would understate working capital for 2014
d. The cost of goods sold for 2014 is overstated

The error would overstate the cost of goods sold for 2014 and understate cost of goods sold for
2015, thus, it would overstate the 2015 net income.

17. Regarding transaction 2, which of the following is incorrect?
a. The error would only have a reclassification to correct it.
b. The net income for the year is unaffected.
c. The entry would debit insurance expense.
d. The working capital for the year is understated.

The error only requires reclassification of accounts, and the current assets at year-end were
correctly stated.


Jing Company reported ending inventory of $570,000 and net income of $5,200,000 for 2014.
The audit produced the following information:

Ending inventory contains 3,000 units erroneously priced at $96 per unit. The correct cost
was $69 per unit.
Merchandise purchased FOB shipping point costing $175,000 were in transit as of
December 31, 2014. This was properly recorded as purchases but was excluded from
ending inventory.
Merchandise sold FOB shipping point $250,000 to Jang Company marked-up 25% above
cost. The merchandise was in transit as of December 31, 2014. There were no entries
made with regards to the sale and the merchandise is included in the ending inventory.

18. What is the correct ending inventory?
a. $664,000
b. $914,000
c. $464,000
d. $714,000

19. What is the corrected net income?
a. $5,344,000
b. $5,194,000
c. $5,554,000
d. $5,169,000

Ending Inventory Net Income
Unadjusted balance $570,000 $5,200,000
Erroneous pricing (OS of EI) (81,000) (81,000)
Understatement of EI 175,000 175,000
Overstatement of EI (200,000) (200,000)
Understatement of sales - 250,000
Adjusted balance $464,000 $5,344,000

20. Failure to record depreciation at the end of the period result in
a. understated income
b. understated assets
c. overstated expenses
d. overstated assets

If depreciation is not recorded, the book value of property, plant and equipment is overstated.

21. Which of the following would both result in an overstatement of both current assets and
shareholders equity?
a. Understatement of accrued sales commissions
b. Noncurrent notes receivable misclassified as current
c. Annual depreciation is understated
d. Failure to record purchases but included in physical count

Understatement of depreciation would overstate the book value of assets and understate
depreciation expense which would understate expenses, thus, overstating net income,
subsequently, and retained earnings.
22. Square Company discovered the following ending inventory errors during the audit:

2012 $440,000 understated
2013 350,000 overstated
2014 540,000 overstated

The January 1, 2014 retained earnings balance is $15,000,000. The unadjusted net income for
2014 is $5,750,000 and unadjusted ending inventory is $2,550,000. A 10% stock dividend was
declared on its 1,000,000 outstanding ordinary shares of $5 par when the market was $7.70.

What is the retained earnings balance on December 31?
a. $19,440,000
b. $19,710,000
c. $20,520,000
d. $20,790,000

January 1 balance $15,000,000
Adjusted net income:
Unadjusted balance $5,750,000
Overstatement of EI (540,000) 5,210,000
Dividends (770,000)
December 31, balance $19,440,000

23. Oncefold Companys beginning inventory is overstated by $29,000 and its ending inventory
is $58,000 understated. What is the effect of the error to cost of goods sold for the year?
a. $58,000 overstated
b. $58,000 understated
c. $87,000 overstate
d. $87,000 understate

$29,000 O + $58,000 O = $87,000 O

24. Alberta Company failed to recognize the following on its books:

Prepaid insurance $250,000
Accrued salaries 750,000
Unearned Income 600,000
Interest Receivable 170,000

If the net income before tax is $7,250,000 before any adjustments from any of the above, what is
the correct net income?
a. $8,680,000
b. $5,980,000
c. $7,520,000
d. $6,320,000


Unadjusted net income $7,250,000
Prepaid Insurance 250,000
Accrued Salaries (750,000)
Unearned Income (600,000)
Interest Receivable 170,000
Adjusted net income $6,320,000

25. Uranus Company had the following errors discovered during the audit:

Beginning inventory was $550,000 understated
Ending inventory was $800,000 overstated
Accrued salaries of $650,000 were not recorded
Prepaid insurance covering a 3-year period were charged to expense for the current year,
$450,000.
Unearned income of $852,000 to render 3-years worth of service were credited to income
for the current year

If the net income for the current year was $6,588,000 before the discovery of the errors, what is
the corrected net income?
a. $4,320,000
b. $4,454,000
c. $4,186,000
d. $5,920,000

Unadjusted net income $6,588,000
Understatement of BI (550,000)
Overstatement of EI (800,000)
Accrued salaries (650,000)
Prepaid insurance 300,000
Unearned income (568,000)
Adjusted net income $4,320,000