Reference no: EM132803263
Question - You were engaged for the first time by Ackerman Corporation to audit their financial statements as of and for the period ended December 31, 2017. In your examination of their financial statements, you discovered the following errors committed during 2016 and 2017:
2016 Errors:
A machinery was purchased on January 2 for P500,000. This transaction was recorded as an expense on the date of purchase. The estimated useful life of the said machinery is 10 years; no residual value.
On January 1, 2017, the entity discovered the error, and provided a correction debiting Machinery and crediting Retained Earnings, both for P500,000. Subsequently, the entity provided a depreciation in 2017 for P50,000. No other entries pertaining to the machinery were made.
Accrued salaries for December totaling to P26,000 were omitted. The entry prepared in 2017 pertaining to the salaries was a debit to Salaries Expense and a credit to Cash, both for P26,000.
Advance payments from customers on December 29, totaling to P178,000, were recorded as sales. The goods were shipped on January 5, 2017.
A one-year note receivable was received on July 1. The face value is P800,000; interest is 10%. No accrual was made for the interest for the year. On June 30, 2017, the entry prepared by the entity included a debit to Cash - P880,000; a credit to Notes Receivable - P800,000; and a credit to Interest Income - P80,000.
Their investment in equity securities, carried at fair market value through profit or loss, was carried at its fair value on December 31, 2015, which is P650,000; and the fair value by the end of 2016 is P695,000. However, the entity was not able to provide an entry for the change in the fair value in 2016. By the end of 2017, the fair value of the investment is P645,000, and the entity prepared an entry debiting Unrealized Holding Gain - Profit or Loss and crediting Financial Asset at Fair Value Through Profit or Loss, both for P5,000.
2017 Errors (aside from the possible effects of the entries and errors mentioned in the 2016 Errors):
Supplies worth P15,000 purchased on January 2 was erroneously debited to an Equipment account which has a remaining useful life of 5 years. As of December 31, only P1,200 worth of supplies remain. The 2017 depreciation provided for the equipment included the erroneous capitalization.
A purchase was made on December 27, and the entity prepared an entry debiting Purchases and crediting Accounts Payable, both for P234,000. The related invoice, which was received on December 29, stated that the term is FOB Destination. The goods were received on January 2, 2018.
Minor repairs made on the building on December 30, totaling to P28,000, was debited to the Building account.
A P2-per-share dividend for the 300,000 outstanding shares was declared on December 15, to be paid on January 31, 2018 to the shareholders on record as of January 15, 2018. No entry was made on the declaration, and the entry prepared by the entity on January 31, 2018 includes a debit to Retained Earnings and a credit to Cash, both for P600.000.
The unadjusted net income for 2017 is P1,556,200.
Required -
1. Calculate the Net Income for 2016 overstated or understated.
2. Calculate the Retained Earnings as of December 31, 2017 overstated or understated.