Topics: Cash to Accrual AND Error Correction
A. Zamboanga Enterprises records all transactions on the cash basis. The company’s accountant prepared the following income statement at the end of the company’s first year of operations:
Zamboanga Enterprises
Income Statement
For the Year Ended December 31, 2006
Sales P2, 016, 000
Selling and administrative expenses:
Salaries expense P624,000
Rent expense 360,000
Utilities expense 232,000
Equipment 240,000
Commission expense 302,400
Insurance expense 48,000
Interest expense 24,000 1,830, 400
Net income P 185,600
You have been asked to prepare an income statement on the accrual basis. The following information is given to you to assist in the preparation:
(a.) Amounts due from costumers at year-end were P224,000. Of this amount, P24,000 will probably not be collected.
(b.) Salaries of P88,000 for December 2006 were paid on January 5, 2007.
(c.) Zamboanga rents its building for P24,000 a month, payable quarterly in advance. The contract was signed on January 1, 2006.
(d.) The bill for December’s utility costs of P21,600 was paid January 10, 2007.
(e.) Equipment of P240,000 was purchased on January 1, 2006. The expected life is 5 years, no salvage value. Assume straight-line depreciation.
(f.) Commissions of 15% of sales are paid on the same day cash is received from customers.
(g.) A 1-year insurance policy was issued in company assets on July 1, 2006. Premiums are paid annually in advance.
(h.) Zamboanga barrowed P400,000 for one year on May 1, 2006. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1, 2006.
QUESTION:
How much is the net income before income tax under the accrual basis of accounting?
B. Misamis Company’s December 31, year end financial statement contained the following errors:
December 31, 2005 December 31, 2006
Ending Inventory P100,000 understated P90,000 overstated
Depreciation expense 20,000 understated
As insurance premium of P75,000 was prepaid in 2005 covering the years 2005, 2006, and 2007. The same was charged to expense in full in 2005. In addition, on December 31,2006, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2007. There were no other errors during 2005, 2006, and 2007 and no corrections have been made for any errors. Ignore income tax considerations.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2005 net income?
(over or under by?)
2. What is the total effect of the errors on the 2006 net income? (over or under by?)
3. What is the total effect of the errors on the company’s working capital at December 31, 2006?
4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2006?
5. What is the total effect of the errors on the company’s working capital at December 31, 2007?
Topics: Cash to Accrual AND Error Correction
A. Zamboanga Enterprises records all transactions on the cash basis. The company’s accountant prepared the following income statement at the end of the company’s first year of operations:
Zamboanga Enterprises
Income Statement
For the Year Ended December 31, 2006
Sales P2, 016, 000
Selling and administrative expenses:
Salaries expense P624,000
Rent expense 360,000
Utilities expense 232,000
Equipment 240,000
Commission expense 302,400
Insurance expense 48,000
Interest expense 24,000 1,830, 400
Net income P 185,600
You have been asked to prepare an income statement on the accrual basis. The following information is given to you to assist in the preparation:
(a.) Amounts due from costumers at year-end were P224,000. Of this amount, P24,000 will probably not be collected.
(b.) Salaries of P88,000 for December 2006 were paid on January 5, 2007.
(c.) Zamboanga rents its building for P24,000 a month, payable quarterly in advance. The contract was signed on January 1, 2006.
(d.) The bill for December’s utility costs of P21,600 was paid January 10, 2007.
(e.) Equipment of P240,000 was purchased on January 1, 2006. The expected life is 5 years, no salvage value. Assume straight-line depreciation.
(f.) Commissions of 15% of sales are paid on the same day cash is received from customers.
(g.) A 1-year insurance policy was issued in company assets on July 1, 2006. Premiums are paid annually in advance.
(h.) Zamboanga barrowed P400,000 for one year on May 1, 2006. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1, 2006.
QUESTION:
How much is the net income before income tax under the accrual basis of accounting?
B. Misamis Company’s December 31, year end financial statement contained the following errors:
December 31, 2005 December 31, 2006
Ending Inventory P100,000 understated P90,000 overstated
Depreciation expense 20,000 understated
As insurance premium of P75,000 was prepaid in 2005 covering the years 2005, 2006, and 2007. The same was charged to expense in full in 2005. In addition, on December 31,2006, a fully depreciated machinery was sold for P160,000 cash, but the sale was not recorded until 2007. There were no other errors during 2005, 2006, and 2007 and no corrections have been made for any errors. Ignore income tax considerations.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. What is the total effect of the errors on the 2005 net income?
(over or under by?)
2. What is the total effect of the errors on the 2006 net income? (over or under by?)
3. What is the total effect of the errors on the company’s working capital at December 31, 2006?
4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2006?
5. What is the total effect of the errors on the company’s working capital at December 31, 2007?
