PROBLEM 5

You are auditing for the first time, the Financial Statements of QRS Inc. for the period ended December 31, 2020.

In the course of your audit you discovered the following:

a. The following items were consistently omitted for each year:

2017 2018 2019 2020

Prepayments P25,000 P22,000 P27,000 P26,000

,Accrued Expenses 30,000 35,000 32,000 34,000

Unearned Income 10,000 12,000 13,000 15,000.

Accrued Income 20,000 18,000 16,000 19,000

b. Deliveries of merchandise to Customers on December 31 of each year, were recorded as sales upon

collection the following year:

Selling Price

2018 P126,000

2019 147,000

2020 133,000

The physical count of inventories was done to all merchandise on hand as of December 31 (before any

deliveries) of each year. Goods were priced to sell at 40% mark-up based on cost.

AUDITING PROBLEMS MIDTERM EXAMINATION

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c. Organization cost amounting to P400,000 at the beginning of 2017 was capitalized and amortized over 5

years starting 2017.

d. The company received a building as a donation from the city government on April 30, 2018 with a

condition that the company shall use the building as a manufacturing plant for twenty years employing

local personnel from the area. The fair value of the said asset was P3M by the time of the donation. The

company incurred P500,000 in remodelling cost bringing the asset to a useful condition by July 1, 2018.

The company is yet to recognize the building donated and has simply charged to 2008 expense the

remodelling cost.

e. The co registered. the following net income from its inception of operations to the current year:

2017 2018 2019 2020

Net income P2,500,000 P1,850,000 P2,250,000 P2,700,000

Requirements:

26. What is the correct net income in 2019?

a. 2,166,000

b. 2,316,000

c. 2,322,000

d. 2,416,000

27. What is the correct net income in 2020?

a. 2,599,000

b. 2,649,000

c. 2,749,000

d. 2,799,000

28. What is the correct Retained Earnings, end in 2018?

a. 4,639,000

b. 4,614,000

c. 4,126,500

d. 4,626,500

29. What is the effect of the errors to the 2020 working capital?

a. 4,000 over

b. 124,000 under

c. 34,000 under

d. 4,000 under

30. What is the retroactive adjustment to the Retained Earnings beginning 2020 as a result of your audit of

the Organization Cost?