Problem 8 The Vitality Company showed pre-tax income of P2,500,000 for the year ended December 31, 2021. On your year-end verification of the transactions of the Company, you discovered the following errors: 1. P1,000,00 worth of merchandise was purchased in 2021 and included in the ending inventory. However, the purchase was recorded only in 2022. 2. A merchandise shipment valued at P1,500,000 was properly recorded as purchases at year end. The merchandise was inadvertently omitted from the physical count, since it has not arrived by December 31, 2021. 3. Value added tax for the fourth quarter of 2021, amounting to P500,000, was included in the Sales account. 4. Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2021. The entire amount was reported as revenue upon receipt. 5. Rent paid on building covering the period from July 1, 2021 to July 1, 2022, amounting to P1,200,000, was paid and recorded as expense on July 1, 2021. The company did not make any adjustment at the end of the year.

Problem 8 The Vitality Company showed pre-tax income of P2,500,000 for the year ended December 31, 2021. On your year-end verification of the transactions of the Company, you discovered the following errors: 1. P1,000,00 worth of merchandise was purchased in 2021 and included in the ending inventory. However, the purchase was recorded only in 2022. 2. A merchandise shipment valued at P1,500,000 was properly recorded as purchases at year end. The merchandise was inadvertently omitted from the physical count, since it has not arrived by December 31, 2021. 3. Value added tax for the fourth quarter of 2021, amounting to P500,000, was included in the Sales account. 4. Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2021. The entire amount was reported as revenue upon receipt. 5. Rent paid on building covering the period from July 1, 2021 to July 1, 2022, amounting to P1,200,000, was paid and recorded as expense on July 1, 2021. The company did not make any adjustment at the end of the year.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter6: Cost Of Goods Sold And Inventory

Section: Chapter Questions

Problem 48E

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Question

PROBLEM 8 - AUDITING PROBLEM
Compute the following:
1. The corrected pre-tax profit for 2021
2. What is the net effect of the foregoing errors on the total assets at December 31, 2021?
3. What is the total understatement of the total liabilities at December 31, 2021?

Problem 8
The Vitality Company showed pre-tax income of P2,500,000 for the year ended December 31, 2021. On your year-end verification of
the transactions of the Company, you discovered the following errors:
1. P1,000,00 worth of merchandise was purchased in 2021 and included in the ending inventory. However, the purchase was recorded only in 2022.
2. A merchandise shipment valued at P1,500,000 was properly recorded as purchases at year end. The merchandise was inadvertently omitted
from the physical count, since it has not arrived by December 31, 2021.
3. Value added tax for the fourth quarter of 2021, amounting to P500,000, was included in the Sales account.
4. Rental of P300,000 on an equipment, applicable for six months, was received on November 1, 2021. The entire amount was reported as revenue
upon receipt.
5. Rent paid on building covering the period from July 1, 2021 to July 1, 2022, amounting to P1,200,000, was paid and recorded as expense on July 1, 2021.
The company did not make any adjustment at the end of the year.

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