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Compute the adjusted net income

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Reference no: EM132830829

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Q1. Karen Company reported net income for a 2-years period as follows: 2017 - Php 120,000 2018 - Php 180,000

In an audit of the financial statement for the year ended December 31, 2017, the following errors were discovered:

Advances to supplier in 2017 were recorded as purchases but the merchandise was received in the following year - Php 20,000

Advances from customers in 2017 recorded as sales in 2017 but the goods were delivered in the following year - Php 50,000

On December 31, the ending inventory was overstated by Php 25,000

Required: Answer the following:

Compute for the adjusted net income in 2017 and 2018 and the Retained Earnings as of December 31, 2017 and 2018.

Give the effect of the error in the 2017 working capital.

Prepare the adjusting entries assuming the respective errors were discovered in (a) 2017; (b) 2018 and (c) 2019.

Q2. You were assigned to do the audit of Karen Company financial statements and had observed the following:

Accrued interest expense of Php 15,000 was not recorded at the end of 2017.

Accrued rent receivable of Php 20,000 was not recorded at the end of 2017

The company paid a 12-month insurance premium of Php 36,000 effective March 1, 2017. The entire amount was debited to an expense account and no adjustment was made at the end of 2017.

The company leased a portion of its building for Php 30,000. The term of the lease is one year ending April 1, 2018. Collection of rent was credited a rent revenue account. At the end of 2017, no entry was made to take up the unearned portion of the amount collected.

The following data were extracted from its financial statements:

2017 2018

Net Income Php 200,000 Php 160,000

Working Capital Php 180,000 Php 260,000

Retained Earnings, End of year Php 200,000 Php 360,000

Required: Compute for the following adjusted balances:

1. Net Income, 2017

2. Working Capital, end 2017

3. Retained Earnings, end of 2017

4. Net Income, 2018

5. Working Capital, end 2017

6. Retained Earnings, end of 2017

7. Adjusting Entries assuming errors were discovered in (a) 2017; (b) 2018 and (c) 2019

Reference no: EM132830829

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