Reference no: EM132647072

Madali Company Problem

a. Beginning merchandise inventory (January 1, 2014) was understated by P8,600.

In reviewing the books of Madali Company early in 2016, you discovered certain items that had occurred during 2014 and 2015. No errors were corrected during 2014. The errors are summarized below:

b. Merchandise costing P2,400 was sold for P5,000 to S. Cain on December 30, 2014, but the sale was recorded in 2015. The merchandise was shipped F.O.B. shipping point and was not included in ending inventory. Madali uses a periodic inventory system.

c. A two-year fire insurance policy was purchased on May 1, 2014, for P6,000. The entire amount was debited to Prepaid Insurance. No adjusting entry was made in 2014 or 2015.

d. A one-year note receivable of P9,600 was held by Madali beginning October 1, 2014. Payment of the 10 percent note and accrued interest was received upon maturity. The entry on October 1, 2015, was a debit to Cash for P10,560, a credit to Note Receivable for P9,600, and a credit to Interest Revenue for P960. No adjusting entry was made on December 31, 2014.

e. Equipment with a ten-year life was purchased on January 1, 2014, for P39,200. No depreciation expense was recorded during 2014 or 2015. Assume that the equipment has no salvage value and that Pelican uses the straight-line method for recording depreciation.

f. Accrued salary of P1,250 and P2,450 were not recorded in 2014 and 2015 respectively.

g. On December 31, 2015, merchandise in transit for P50,000, purchased FOB shipping point was recorded but not included in the inventory count.

h. On December 30, 2015, the company sold an equipment with an accumulated depreciation of P450,000 and a book value of P75,000 for P115,000. The sale was not recorded until January 5, 2016.

Required:

Question 1. Net effect in 2014 net income

Question 2. Adjusted Net Income 2015

Question 3. Net Effect in the working Capital 2015

Question 4. Net effect in the Retained Earnings 2015