Client 1: SpongeBob Corporation A. SpongeBob received P 324,000 from Patrick, a customer, at the beginning of 2018 for services that it is to perform evenly over a three-year period beginning in 2018. None of the amount received was reported as unearned revenue at the end of 2018. B. Merchandise inventory costing P 163,800 was in the warehouse at December 31, 2018, but was incorrectly omitted from the physical count at that date. SpongeBob uses the periodic inventory method. C. A machine costing P36,000 was expensed when purchased on July 1, 2018. It is expected to have a 4-year life with no residual value. The company typically uses straight-line depreciation for all property, plant and equipment. D. Research costs of P297,000 were incurred early in 2018 and recorded as assets to be amortized over 36 months. Amortization expense for 2018 and 2019 include
Client 1: SpongeBob Corporation
A. SpongeBob received P 324,000 from Patrick, a customer, at the beginning of 2018
for services that it is to perform evenly over a three-year period beginning in 2018.
None of the amount received was reported as unearned revenue at the end of
2018.
B. Merchandise inventory costing P 163,800 was in the warehouse at December 31,
2018, but was incorrectly omitted from the physical count at that date. SpongeBob
uses the periodic inventory method.
C. A machine costing P36,000 was expensed when purchased on July 1, 2018. It is
expected to have a 4-year life with no residual value. The company typically uses
straight-line
D. Research costs of P297,000 were incurred early in 2018 and recorded as assets to
be amortized over 36 months. Amortization expense for 2018 and 2019 include
amortization on the capitalized research cost.
E. Interest income of P126, 900 was not accrued at the end of 2018. It was recorded
when received in February 2019.
F. On January 4, 2018, SpongeBob leased display showrooms for 5 years at a monthly
rental of P 72,000. On that date, the company paid several amounts presented in
Note 4, which were expensed when paid. Assume PAS 17 is applicable.
Client 2: Terra Corporation
DALMI CORPORATION has used the accrual basis of accounting for several years. A review
of the records, however, indicates that some expenses and revenues have been handled
on a cash basis because of errors made by the company’s inexperienced bookkeeper Miss
Fei. Income statements prepared by Miss Fei reported P 3,480,000 net income for 2018
and P 4,440,000 net income for 2019. Further examination of the records reveals that the
following items were not properly accounted for:
A. Office supplies purchased have been charged to expense accounts upon
acquisition. Unused supplies (as verified by supplies count) at the end of each year
are as shown in Note 5.
B. Salaries payable on December 31 have been consistently omitted from the records
of that date and have been entered as expenses when paid in the following year,
as shown in Note 6.
C. Rent was received from a tenant in December 2018. The amount, P120,000, was
recorded as income at that time even though the rental pertained to 2019.
Note 4 – Amounts paid by SpongeBob Corporation in connection with lease of showroom
Security Deposits P 180,000
First month’s rent 72,000
Last month’s rent 72,000
P 324,000
Note 5- Office Supplies charged to expense upon acquisition
December 31, 2017 P 156,000
December 31, 2018 112,800
December 31, 2019 170,400
Note 6 – Salaries payable omitted at Year-end
December 31, 2017 P 132,000
December 31, 2018 144,000
December 31, 2019 112,800
REQUIRED: Assume that all amounts are material and ignore income tax effects.
Determine the following.
1. Understatement of SpongeBob’s net income in 2018:
2. Overstatement of SpongeBob’s net income in 2019:
3. Understatement of SpongeBob’s December 31, 2019
4. Dalmi’s adjusted net income for 2018:
5. Dalmi’s adjusted net income for 2019:
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