PROBLEM 4 An examination of the accounting records of Mervyn Company for the year ended December 31, 2004 indicated that several errors were committed as follows: 1. Purchase of merchandise in the amount of P10,625 in 2003 was not recorded until the following year but was included in the year's inventory. 2. 3. 4. 5. 6. 7. 8. 9. In August 2004, an P8,750 invoice for office supplies was charged to purchases. Office supplies are expensed as purchased. Inventory on December 31, 2004 was overstated by P56,250. An equipment costing P125,000 and with an accumulated depreciation of P75,000 was sold for 68,750 on January 1, 2004. In addition, depreciation was recorded for the equipment for 2004 at the rate of 10%. Proceeds from sale was credited to the Equipment account. Footings and extensions showed that the inventory on December 31, 2003 was overstated by P 59,375. Depreciation of equipment costing P15,000 bought on June 30, 2001 was computed based on an estimated useful life of 8 years. The engineers estimated that the useful life of the asset should be revised to 10 years effective 2004. The company still provided for depreciation based on the old estimate. Interest of P6,250 on notes receivable was not recognized on December 31, 2004. Sales on account of P25,000 in December 2004 were recorded in 2005. Taxes of P18,750 applicable for the fourth quarter of 2003 were paid and charged to expense on January 20, 2004. A fully depreciated machinery was sold on December 31, 2004 but the sale was not recorded until 2005. The proceeds from sales on this machinery costing P437,500 was P31,250. On December 20, 2003, a cash advance of P37,500 from a customer was received for goods to be delivered in January 2004. The amount of cash received was credited to sales. The company's gross profit is 20% of cost. Insurance premium for a three year period amounting to P15,000 was charged to expense on January 1, 2003 and no adjustment was made on year end. A collection of P31,250 from a customer was received on December 31, 2004 but not recorded until January 4, 2005. A customer's check of P8,750 was returned by the bank on November 3, 2004 due to lack of sufficient funds. Adjustment was made the following year. Depreciation computed on the building for the years 2003 and 2004 was overstated by P12,500 per year. 10. 11. 12. 13. 14. 15. Records of Mervyn Company reported the following net Income. 2003 P 546,875 2004 625,000 REQUIREMENTS: 1. Prepare a worksheet showing the corrected income for 2003 and 2004. 2. Prepare the necessary adjusting entries on December 31, 2004 assuming: Books are still open b. Books are closed a. PROBLEM 4 An examination of the accounting records of Mervyn Company for the year ended December 31, 2004 indicated that several errors were committed as follows: 1. Purchase of merchandise in the amount of P10,625 in 2003 was not recorded until the following year but was included in the year's inventory. 2. 3. 4. 5. 6. 7. 8. 9. In August 2004, an P8,750 invoice for office supplies was charged to purchases. Office supplies are expensed as purchased. Inventory on December 31, 2004 was overstated by P56,250. An equipment costing P125,000 and with an accumulated depreciation of P75,000 was sold for 68,750 on January 1, 2004. In addition, depreciation was recorded for the equipment for 2004 at the rate of 10%. Proceeds from sale was credited to the Equipment account. Footings and extensions showed that the inventory on December 31, 2003 was overstated by P 59,375. Depreciation of equipment costing P15,000 bought on June 30, 2001 was computed based on an estimated useful life of 8 years. The engineers estimated that the useful life of the asset should be revised to 10 years effective 2004. The company still provided for depreciation based on the old estimate. Interest of P6,250 on notes receivable was not recognized on December 31, 2004. Sales on account of P25,000 in December 2004 were recorded in 2005. Taxes of P18,750 applicable for the fourth quarter of 2003 were paid and charged to expense on January 20, 2004. A fully depreciated machinery was sold on December 31, 2004 but the sale was not recorded until 2005. The proceeds from sales on this machinery costing P437,500 was P31,250. On December 20, 2003, a cash advance of P37,500 from a customer was received for goods to be delivered in January 2004. The amount of cash received was credited to sales. The company's gross profit is 20% of cost. Insurance premium for a three year period amounting to P15,000 was charged to expense on January 1, 2003 and no adjustment was made on year end. A collection of P31,250 from a customer was received on December 31, 2004 but not recorded until January 4, 2005. A customer's check of P8,750 was returned by the bank on November 3, 2004 due to lack of sufficient funds. Adjustment was made the following year. Depreciation computed on the building for the years 2003 and 2004 was overstated by P12,500 per year. 10. 11. 12. 13. 14. 15. Records of Mervyn Company reported the following net Income. 2003 P 546,875 2004 625,000 REQUIREMENTS: 1. Prepare a worksheet showing the corrected income for 2003 and 2004. 2. Prepare the necessary adjusting entries on December 31, 2004 assuming: Books are still open b. Books are closed a