Reference no: EM133182323
Question - Moti Inc. does not maintain adequate accounting records. You were engaged to audit the 2020 financial statements and upon analysis, you found the following errors.
a. The bookkeeper inadvertently failed to record a cash receipt of P10,000 on the sale of merchandise in 2020.
b. Utilities payable at the end of 2019 of P25,000 and at the end of 2020 of P32,000 were not recorded.
c. Moti Company failed to recognize the unexpired rent at the end of 2019 and 2020 amounting to P4,000 and P6,000, respectively.
d. The company uses the direct-write off method of accounting for bad debts. In 2020, the Company decided to set-up an allowance for the estimated uncollectible accounts as of December 31, 2020 for 2019 accounts of P7,000, and for 2020 accounts of P15,000. It has also decided to correct the charge against each year so that it shows the losses (actual and estimated) relating to that year's sales.
Accounts have been written off to bad debts expense as follows:
In 2019 In 2020
2019 accounts 4,000 20,000
2020 accounts 16,000
1. What is the effect on 2020 net income of the failure to record cash receipts from customer?
a. P10,000 overstated c. P20,000 understated
b. P10,000 understated d. no effect
2. What is the entry to correct the effect of the omission of accrued utilities?
a. Utilities expense 32,000
Utilities payable 32,000
b. Retained earnings 32,000
Utilities payable 32,000
c. Utilities expense 25,000
Retained earnings 7,000
Utilities payable 32,000
d. Utilities expense 7,000
Retained earnings 25,000
Utilities payable 32,000