PROBLEM NO. 1 Magnanimous Corporation was organized in late 2019 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes. P140,000* 160,000 "Includes a P10,000 increase because of change in bad debt expense rate. P205,000 276,000 2019 2021 2020 2022 The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Magnanimous hired the auditing firm of Cortesi and Co., CPAS and has provided the following additional information. 1. In early 2020, Magnanimous changed its estimate from 2% to 1% of receivables on the amount of bad debt expense to be charged to operations. Bad debt expense for 2019, if a 1% rate had been used, would have been P10,000. The company therefore restated its net income for 2019. 2. The auditor discovered that in 2022, the company had changed its method of inventory pricing from average-cost to FIFO. The effect on the income statements for the previous years is as follows. 2019 P140,000 2020 P160,000 165,000 P5,000 2021 P205,000 215,000 P10,000 2022 Net income unadjusted-average-cost basis Net income unadjusted–FIFO basis 155,000 P15,000 P276,000 260,000 (P16,000) 3. In 2022, the auditor discovered that: a. The company incorrectly overstated the ending inventory by P14,000 in 2021. b. A dispute developed in 2020 with the tax authorities over the deductibility of entertainment expenses. In 2019, the company was not permitted these deductions, but a tax settlement was reached in 2022 that allowed these expenses. As a result of the court's finding, tax expenses in 2022 were reduced by P60,000. Instructions: a. Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.) b. Present comparative net income numbers for the years 2019 to 2022. (Ignore income tax considerations.)

PROBLEM NO. 1 Magnanimous Corporation was organized in late 2019 to manufacture and sell hosiery. At the end of its fourth year of operation, the company has been fairly successful, as indicated by the following reported net incomes. P140,000* 160,000 "Includes a P10,000 increase because of change in bad debt expense rate. P205,000 276,000 2019 2021 2020 2022 The company has decided to expand operations and has applied for a sizable bank loan. The bank officer has indicated that the records should be audited and presented in comparative statements to facilitate analysis by the bank. Magnanimous hired the auditing firm of Cortesi and Co., CPAS and has provided the following additional information. 1. In early 2020, Magnanimous changed its estimate from 2% to 1% of receivables on the amount of bad debt expense to be charged to operations. Bad debt expense for 2019, if a 1% rate had been used, would have been P10,000. The company therefore restated its net income for 2019. 2. The auditor discovered that in 2022, the company had changed its method of inventory pricing from average-cost to FIFO. The effect on the income statements for the previous years is as follows. 2019 P140,000 2020 P160,000 165,000 P5,000 2021 P205,000 215,000 P10,000 2022 Net income unadjusted-average-cost basis Net income unadjusted–FIFO basis 155,000 P15,000 P276,000 260,000 (P16,000) 3. In 2022, the auditor discovered that: a. The company incorrectly overstated the ending inventory by P14,000 in 2021. b. A dispute developed in 2020 with the tax authorities over the deductibility of entertainment expenses. In 2019, the company was not permitted these deductions, but a tax settlement was reached in 2022 that allowed these expenses. As a result of the court's finding, tax expenses in 2022 were reduced by P60,000. Instructions: a. Indicate how each of these changes or corrections should be handled in the accounting records. (Ignore income tax considerations.) b. Present comparative net income numbers for the years 2019 to 2022. (Ignore income tax considerations.)

SWFT Comprehensive Vol 2020

43rd Edition

ISBN:9780357391723

Author:Maloney

Publisher:Maloney

Chapter6: Deductions And Losses: In General

Section: Chapter Questions

Problem 44P

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Correction of Errors and Accounting Changes

PROBLEM NO. 1
Magnanimous Corporation was organized in late 2019 to manufacture and sell hosiery. At the end of its
fourth year of operation, the company has been fairly successful, as indicated by the following reported net
incomes.
P140,000*
160,000
*Includes a P10,000 increase because of change in bad debt expense rate.
2019
2021
P205,000
2020
2022
276,000
The company has decided to expand operations and has applied for a sizable bank loan. The bank officer
has indicated that the records should be audited and presented in comparative statements to facilitate
analysis by the bank. Magnanimous hired the auditing firm of Cortesi and Co., CPAS and has provided the
following additional information.
1. In early 2020, Magnanimous changed its estimate from 2% to 1% of receivables on the amount of
bad debt expense to be charged to operations. Bad debt expense for 2019, if a 1% rate had been
used, would have been P10,000. The company therefore restated its net income for 2019.
2. The auditor discovered that in 2022, the company had changed its method of inventory pricing
from average-cost to FIFO. The effect on the income statements for the previous years is as
follows.
2019
P140,000
2020
2021
2022
Net income unadjusted-average-cost basis
Net income unadjusted-FIFO basis
155,000
P15,000
P160,000
165,000
P5,000
P205,000
215,000
P10,000
P276,000
260,000
(P16,000)
3. In 2022, the auditor discovered that:
a. The company incorrectly overstated the ending inventory by P14,000 in 2021.
b. A dispute developed in 2020 with the tax authorities over the deductibility of
entertainment expenses. In 2019, the company was not permitted these deductions, but a
tax settlement was reached in 2022 that allowed these expenses. As a result of the court's
finding, tax expenses in 2022 were reduced by P60,00o.
Instructions:
a. Indicate how each of these changes or corrections should be handled in the accounting records.
(Ignore income tax considerations.)
b. Present comparative net income numbers for the years 2019 to 2022. (Ignore income tax
considerations.)

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