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    Retrospectively in The First Set of Financial Statements Authorized For Issue After

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    The document discusses prior period errors, which are omissions or misstatements in previous financial statements that could have been prevented if reliable information was available and accounted for properly. Prior period errors are corrected retrospectively by restating comparative amounts in previous financial statements or opening balances. The types of errors include balance sheet errors affecting assets/liabilities, income statement errors affecting revenues/expenses, and combined errors affecting both. Sample problems demonstrate accounting for errors discovered in different periods and counterbalancing errors that offset over two periods.

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    Retrospectively in The First Set of Financial Statements Authorized For Issue After

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    197 views7 pages
    The document discusses prior period errors, which are omissions or misstatements in previous financial statements that could have been prevented if reliable information was available and accounted for properly. Prior period errors are corrected retrospectively by restating comparative amounts in previous financial statements or opening balances. The types of errors include balance sheet errors affecting assets/liabilities, income statement errors affecting revenues/expenses, and combined errors affecting both. Sample problems demonstrate accounting for errors discovered in different periods and counterbalancing errors that offset over two periods.

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    Prior-Period-Error

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    The document discusses prior period errors, which are omissions or misstatements in previous financial statements that could have been prevented if reliable information was available and accounted for properly. Prior period errors are corrected retrospectively by restating comparative amounts in previous financial statements or opening balances. The types of errors include balance sheet errors affecting assets/liabilities, income statement errors affecting revenues/expenses, and combined errors affecting both. Sample problems demonstrate accounting for errors discovered in different periods and counterbalancing errors that offset over two periods.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    197 views7 pages

    Retrospectively in The First Set of Financial Statements Authorized For Issue After

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    max p
    The document discusses prior period errors, which are omissions or misstatements in previous financial statements that could have been prevented if reliable information was available and accounted for properly. Prior period errors are corrected retrospectively by restating comparative amounts in previous financial statements or opening balances. The types of errors include balance sheet errors affecting assets/liabilities, income statement errors affecting revenues/expenses, and combined errors affecting both. Sample problems demonstrate accounting for errors discovered in different periods and counterbalancing errors that offset over two periods.

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    of 7

    DE CASTRO, Marvin A.

    DIMAPANAG, Rey Marvin J.


    REMATA, Dion David C. II

    I. What is a prior period error?


    Prior Period Error- omissions from, and misstatements in the entity’s financial
    statements for one or more prior periods arising from a failure of use or misuse
    of reliable information that:
    A. Was available when financial statements for those periods were authorized for
    issue; and
    B. Could reasonably be expected to have been obtained and taken in account in
    the preparation and presentation of those financial statements.
    Such errors include the effects of mathematical mistakes, mistakes in applying
    accounting policies, oversights or misinterpretation of facts, and fraud.

    II. Explain briefly the accounting treatment of prior period error.


    Accounting Method
    According to PAS 8 pr. 42, “an entity shall correct material prior period errors
    retrospectively in the first set of financial statements authorized for issue after
    their discovery by:
    A. Restating the comparative amounts for the prior period(s) presented in which
    the error occurred; or
    B. If the error occurred before the earliest prior period presented, restating the
    opening balances of assets, liabilities, and equity for the earliest prior period
    presented.

    III. Explain the types of errors. Describe each.


    TYPES of ERRORS
    1. Balance sheet errors- this error affects only the presentation of an asset,
    liability, or stockholders’ equity account. When the error is discovered in the
    error year, the company reclassifies the item to its proper position. If the
    error in a prior year is discovered in a subsequent period, the company
    should restate the statement of financial position of the prior year for
    comparative purposes.

    2. Income Statement errors- this error affects only income statement accounts
    and may include improper classification of revenues or expenses. When the
    error is discovered in the error year, the company should reclassify the item. If
    the error discovered pertains to a prior year, the company should restate the
    income statement of the prior year for comparative purposes.

    3. Combined errors- errors affecting both the statement of financial position and
    income statement and an be classified as follows:
    A. Counterbalancing errors- this are errors that will offset or be corrected over
    two accounting periods.
    B. Non-counterbalancing errors- this are errors that do not offset in the next
    accounting period. Therefore, companies must make correcting entries,
    even if they closed the books.
    IV. Problems:
    Problem 6-1 Income Statement and SFP Errors

    Questions:
    1. Net Income in 2017
    a. P200,000.
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Rent income under, NI under.
    Miscellaneous Income over, NI 0 0 0 0
    over
    Accounts Payable under, Notes
    Payable over. NI unaffected 0 0 0 0
    Adjusted Balance P200,000 P160,000 P200,000 P360,000

    2. Working capital, end of 2017


    b. P180,000.
    Working capital, 2017 P180,000
    Effects on the working capital: Over or (Under)
    Accounts Payable Under, Working Capital Over P28,000
    Notes Payable Over, Working Capital Under (28,000) 0
    Working capital, end of 2017 P180,000
    Note: There is no effect on the working capital.

    3. Retained Earnings, end of 2017


    a. P200,000.
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Rent income under, NI under.
    Miscellaneous Income over, NI 0 0 0 0
    over
    Accounts Payable under, Notes
    Payable over. NI unaffected 0 0 0 0
    Adjusted Balance P200,000 P160,000 P200,000 P360,000

    4. Net income in 2018


    c. P160,000.
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Rent income under, NI under.
    Miscellaneous Income over, NI 0 0 0 0
    over
    Accounts Payable under, Notes
    Payable over. NI unaffected 0 0 0 0
    Adjusted Balance P200,000 P160,000 P200,000 P360,000
    5. Working capital, end of 2018
    c. P260,000.
    Over or (Under)
    Working capital, 2018 P260,000
    Effects on the working capital: 0
    Working capital, end of 2017 P260,000

    Note: There is no effect on the working capital.

    6. Retained earnings, end of 2018


    c. P360,000.
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Rent income under, NI under.
    Miscellaneous Income over, NI 0 0 0 0
    over
    Accounts Payable under, Notes
    Payable over. NI unaffected 0 0 0 0
    Adjusted Balance P200,000 P160,000 P200,000 P360,000

    7. Prepare adjusting entries assuming errors were discovered in (a) 2017, (b)
    2018, and (c) 2019.

    Adjusting entries if errors were discovered in:


    2017:
    Rent Income 25,000
    Miscellaneous Income 25,000
    Notes Payable 28,000
    Accounts Payable 28,000

    2018:
    No adjusting entries
    2019:
    No adjusting entries

    Note:
    In 2018 and 2019, there are no adjusting entries for the errors
    because the effect of the error will offset when closed to the retained
    earnings, and the accounts and notes payable are assumed to have been
    settled at the end of those years.
    Problem 6-2 Counterbalancing Errors

    Questions:
    1. Net income in 2017
    c. P203,500
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Accrued Interest Expense under,
    NI over (15,000) 15,000 (15,000) 0
    Rent revenue under,
    NI under 20,000 (20,000) 20,000 0
    Insurance Expense over,
    NI under 6,000 (6,000) 6,000 0
    Rent Revenue over, NI over (7,500) 7,500 (7,500) 0
    Adjusted Balance P203,500 P156,500 P203,500 P360,000

    2. Working capital, end of 2017


    b. P183,500
    Working capital, 2017 P180,000
    Effects on the working capital: Over or (Under)
    Salaries Payable Under, WC Over P28,000
    Rent Receivable under, WC under (20,000)
    Prepaid Insurance under, WC under (6,000)
    Unearned Rent Revenue under, WC over 7,500 (3,500)
    Working capital, end of 2017 P183,500

    3. Retained Earnings, end of 2017


    c. P203,500
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Accrued Interest Expense under,
    NI over (15,000) 15,000 (15,000) 0
    Rent revenue under,
    NI under 20,000 (20,000) 20,000 0
    Insurance Expense over,
    NI under 6,000 (6,000) 6,000 0
    Rent Revenue over, NI over (7,500) 7,500 (7,500) 0
    Adjusted Balance P203,500 P156,500 P203,500 P360,000

    4. Net income in 2018


    c. P156,500
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Accrued Interest Expense under,
    NI over (15,000) 15,000 (15,000) 0
    Rent revenue under,
    NI under 20,000 (20,000) 20,000 0
    Insurance Expense over,
    NI under 6,000 (6,000) 6,000 0
    Rent Revenue over, NI over (7,500) 7,500 (7,500) 0
    Adjusted Balance P203,500 P156,500 P203,500 P360,000

    5. Working capital, end of 2018


    b. P260,000
    Over or (Under)
    Working capital, 2018 P260,000
    Effects on the working capital: 0
    Working capital, end of 2017 P260,000

    6. Retained earnings, end of 2018


    c. P360,000
    Net Income Retained Earnings
    2017 2018 2017 2018
    Unadjusted balance P200,000 P160,000 P200,000 P360,000
    Accrued Interest Expense under,
    NI over (15,000) 15,000 (15,000) 0
    Rent revenue under,
    NI under 20,000 (20,000) 20,000 0
    Insurance Expense over,
    NI under 6,000 (6,000) 6,000 0
    Rent Revenue over, NI over (7,500) 7,500 (7,500) 0
    Adjusted Balance P203,500 P156,500 P203,500 P360,000

    7. Prepare adjusting entries assuming errors were discovered in (a) 2017, (b)
    2018, and (c) 2019.

    Adjusting entries if errors were discovered in:


    2017:
    Interest Expense 15,000
    Interest Payable 15,000
    Rent Receivable 20,000
    Rent Income 20,000
    Prepaid Insurance 6,000
    Insurance Expense 6,000
    Rent Revenue 7,500
    Unearned Rent Revenue 7,500
    2018
    Retained Earnings 15,000
    Interest Expense 15,000
    Rent Income 20,000
    Retained Earnings 20,000
    Insurance Expense 6,000
    Retained Earnings 6,000
    Retained Earnings 7,500
    Rent Revenue 7,500
    Problem 6-2 Counterbalancing Errors
    Problem 6-7

    Questions:
    1. The entry to correct the error described in item a should include a
    a. Credit to prepaid insurance – P21,000.

    Adjusting entries
    2016: Prepaid Insurance 35,000
    Insurance Expense 35,000
    Insurance Expense 7,000
    Prepaid Insurance 7,000
    2017: Prepaid Insurance 35,000
    Retained Earnings 35,000
    Insurance Expense 7,000
    Retained Earnings 7,000
    Prepaid Insurance 14,000
    2018: Prepaid Insurance 35,000
    Retained Earnings 35,000
    Insurance Expense 7,000
    Retained Earnings 14,000
    Prepaid Insurance 21,000

    2. The entry to correct the error described in item b should include a


    b. Debit to retained earnings – P25,000.

    Adjusting entries
    2017: Cost of Sales 25,000
    Merchandise Inventory 25,000
    2018: Retained Earnings 25,000
    Merchandise Inventory, Beg 25,000

    3. The entry to correct the error described in item c should include a


    a. Debit to retained earnings – P15,500.

    Adjusting entries
    2017: Commission Expense 15,500
    Commission Payable 15,500
    2018: Retained Earnings 15,500
    Commission Expense 15,000

    4. The entry to correct the error described in item d should include a


    d. No adjusting entry is needed.

    Note: There is no prior period errors described in item d.

    5. After correcting all the errors described in items a to e, retained earnings


    should
    b. Increase by P60,500

    Retained Earnings
    P14,000 P35,000
    25,000 100,000
    15,500
    20,000
    P74,500 P135,000

    P60,500 - Increase

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