Answered: 20x2 Ending inventory P320,000…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cromwell Company began operations on January 1, 20x1. Financial statements for the years ended December 31, 20x1 and 20x2 contained the following errors:

	20x1	20x2
Ending inventory	P320,000 understated	P300,000 overstated
Depreciation expense	120,000 understated
Insurance expense	200,000 overstated	200,000 understated
Prepaid insurance	100,000 understated

The reported net income for 20x1 is P648,000 and P894,000 for 20x2. In addition, on December 31, 20x2, a fully depreciated machinery was sold for P216,000 cash, but the sale was not recorded until 20x3. There were no other errors during 20x1 and 20x2, and no corrections have been made for any of the errors. Ignore income tax effects.

REQUIRED: Compute the total effects of errors and indicate whether overstated or understated.

Total effect of the errors on Elizabeth’s 20x1 net income

Total effect of the errors on Elizabeth’s 20x2 net income

Total effect of the errors on Elizabeth’s working capital on December 31, 20x2

Total effect of the errors on Retained Earnings balance on December 31, 20x2

Corrected net income for 20x1

Corrected net income for 20x2

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