Wrapping up!

- Applying IAS 8
1. On December 31, 2015, Carmel Corp., a calendar yearend company discovered some errors on its
present and the past financial statements. Data for errors are summarized as follows:
2014
$ 1,000
8,000
450
3,000

1. Failed to accrue interest receivable

2. Failed to record repairs expense
3. Failed to record prepaid insurance
4. Understated depreciation expense

2015
$ 2,250
10,000
250

On January 1, 2013, Carmel Corp. purchased an office equipment for cash worth $10,000, with a
residual value of $2,000 and useful life of 5 years. Carmels accountant recorded the transaction
as:
Maintenance expense
$10,000
Cash in bank
To record the acquisition of an office equipment for cash.

$10,000

Carmel capitalized a research and development expense, using the Patent account that should
have been expensed as incurred. It amounted to $6,000 and amortized for 5 years starting July 1,
2013.
Net income for 2014 - $33,200 2015 - $36,320
Retained Earnings as of January 1, 2016 is $66,600
Required:
1. How much is the correct profit of Carmel Corp. for 2015?
2. What is the correct amount of retained earnings as of January 1, 2016?
3. Prepare the necessary journal entries for 2015, assuming the books are not yet closed.
Ignore income tax on all scenarios.

2. Rosemary Co. underwent a review of its financial records at December 31, 2015 (end of annual
accounting period). During the review, the following situations were found that need immediate action.
a. On December 26, 2015, an equipment that cost $20,000 was debited in full to 2015 operating
expenses. The equipment has a 5 year estimated life and no residual value. The entity uses
straight-line method of depreciation.
b. Late in 2015, the company constructed its own warehouse (self-constructed asset). Rosemary
incurred $90,000 for materials, labor and overhead. However, during the course of construction,
the entity knew that the cost of construction from outside party with a similar design costs
$100,000. Therefore, Rosemary made the following entry in the accounts.
Warehouse
Cash
Profit from self-construction

$100,000
$90,000
10,000

c. Prior to recording the 2015 depreciation expense, the management decided that a large
machine
that originally cost $128,000 should have been depreciated over a useful life of 14 years instead of
20 years. The machine was acquired January 5, 2010. Assume the residual value of $8,000 did
not change.
d. During December 2015, the company disposed an old machine for $6,000 cash. Annual
depreciation was $2,000. At the beginning of 2015, the accounts reflected the following:
Machine (cost)
$18,000
Accumulated depreciation
13,000
No depreciation has been recorded in 2015. At the date of disposal, the following entry were
made:
Cash
$6,000
Machine
$6,000
Net income for 2015 is $78,250.
Required:
1. Prepare the necessary correcting entries assuming that the books are still open at
December 31, 2015
2. What is the correct profit for 2015?
3. Upon inspection of the records of Loot Co. the following facts were discovered for the fiscal year ended,
June 30, 2015.
a. A fire insurance premium of $4,000 was paid and charged as expense in 2015. The fire
insurance covers one year from January 3, 2015.
b. Inventory on July 1, 2014 was understated by $8,000. Meanwhile inventory on June
30, 2015 was understated by $12,000.
c. Business taxes of $5,500 were paid on July 17, 2015 and charged as expense for the
next fiscal year.
d. On June 30, 2015, a cash advance of $10,000 by a customer was received for goods to
be delivered in July 2015. The $10,000 was credited to sales. The companys gross profit
rate on sales is 33%.
e. The profit of Loot Co. for the fiscal year ended June 30, 2015 before any adjustments
for the given information is $155,000.

Required:
1. What is the correct profit of Loot Co. for the fiscal year ended June 30, 2015?
2. Prepare the necessary correcting entries assuming that the books are still open at December 31,
2015