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Problem no.

1
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable
transactions. You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal,
from which posting are made to a subsidiary accounts payable ledger. The subsidiary ledger balance of P1,500,000 as of December 31, 2010
agrees with the accounts payable balance in the company’s general ledger. An analysis of the account disclosed the following:
Trade creditors, credit balances
P 1,363,000
Trade creditors, debit balances
63,000
Net
P 1,300,000
Estimated warranty on products sold
100,000
Customer’s deposits
9,000
Due to officers and shareholders for advances
50,000
Goods received on consignment at selling price (offsetting debit made to Purchases)
41,000
P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates:
Date

Items
Miscellaneous debit balances prior to 2007.
No information available due to loss of records in a fire.

Amount
P 3,000

03/03/07 Manila Co. –Merchandise returned for credit, but the company is now out of business

8,000

06/10/09 Cebu Corp. – Merchandise returned but Cebu says “never received”

7,000

07/10/10 Jolo Distributors – Allowance granted on defective merchandise after the invoice was paid

5,000

10/10/10 Bulacan Co – Overpayment of invoice

12,000

12/05/10 Advance to Zambales Co. This company agrees to supply certain articles on a cost –plus basis

24,000

12/05/10 Goods returned for credit and adjustments on price after the invoices were paid; credit memos
from supplier not yet received

4,000
63,000

Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts. In this connection, you discover an
invoice from Atlas Co. of P45,000 dated December 12, 2010 marked “Duplicate”, which was entered in the Purchase Journal in January 2011.
Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been
received.
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash
Disbursements Journal of December, but these checks were not issued until January 10, 2011.
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the
year 2010. These goods are included in your adjusted inventory.
1. The Accounts payable – Trade balance at December 31, 2010 should be
A. P 1,471,000
B. P 1,614,000
C. P 1,214,000
2. The net adjustment to Purchases should include a
A. Net debit of P 51,000
B. Net credit of P 41,000

C. Net debit of P 10,000

D. P 1,477,000
D. Net debit of P 73,000

3. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A. P 18,000
B. P 23,000
C. P 35,000
D. P 39,000
4. The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A. Miscellaneous losses if P 23,000
B. Advances to suppliers of P 24,000
C. Suppliers to debit balances of P 18,000
D. Purchases of P 21,000
5. Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because
A. There is likely to be other reliable external evidence to support the balances
B. Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment
C. This is a duplication of cutoff test
D. Accounts payable at the end of reporting period may not be paid before the audit is completed.

23. received 01. The portion of the Notes payable – bank to be reported under current liabilities as of December 31. you obtained from the voucher register the information shown in the working paper below.000 Total noncurrent liabilities as of December 31.000 Problem no. Item no. with a term of 20 years.000 17. Based on the above and the result of your audit.10 12.000.10. issued June 30. 1. Principal and interest payable annually on April 30.21. 12.10 to 12.10 Voucher Ref. 11 ½% note issued January 2.000 The following additional information pertains to these liabilities: a. payable on demand. 2011.938.000 b.998. Interest payable as of December 31.29.960.10 Auto insurance. 2010.10.000 Notes payable – trade 190. 8% note issued March 1. Accounts payable P 650.000 b.28. 2001.05.17. 2010 is a. 2010. 12. The interest was paid on December 31.950.11 01.10 12-204 12-206 12-214 5 6 7 8 12.05. 4. purchased FOB destination.20.11 Repairs services. received 12. (1) A P300.760.000.26.000 Wages and salaries payable 15.000 c.26.000 Inventory 46. 12.10.Problem 2 You were able to obtain the following from the accountant for Maverics Corp.000 b.000 Legal and prof expense Medical expense Inventory . 3.000 24.10 Payroll. The 12% mortgage note was issued may 1.10 Medical services for employees for December 2010 Merchandise.000 c. P500. On December 30.138.000 Prepaid insurance Repairs and maintenance Inventory 69.10 12.10.11 Merchandise. received 12.18.02. 3 In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31. shipped FOB Shipping point. Total current liabilities as of December 31. d. 2010. Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due. P 3.02.29. 3. Mavericks is three months behind in paying its required interest payment.10 12-219 12-221 12-230 12-234 9 12. shipped FOB destination.11 01-001 01-002 01-003 Description Amount Account Charged Supplies.04. 12.20.15.10 Merchandise.000 2. 2011.24. The 10% mortgage note was issued October 1. The current principal amount due is P 1.000. answer the following: 1. With a term of 10 years.000 d. P1.04. received 01.28.000 25.560.500 Salaries and wages Dues and subscription Utilities expense Inventory 84. The payment includes interest of P 180.11 01. Bank notes payable include two separate notes payable Allied Bank.06. 8% binds. shipped FOB shipping point. 4.000 5.18. 3. 2007.21.10 12. 2010 is a. 2008. 2010 is a.11 P 20. 12.28. Interest is payable semi-annually every June 30 and December 31. (2) A 1-year. 0 3. 12-202 2 3 4 12. 500. All trade notes payable are due within six months of the balance sheet date.26. Related to the companys liability as of December 31. 11.500. b. 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year.960. e. P155.000 c.000 d. P 300. shipped FOB destination. 203. 2.800. 2.20. Interest is payable every six months.10 Legal services. 1 Entry Date 12.000 55. A payment of P220. received 12.21. 2010 is a.000 Supplies on hand 24. 2010. received 12.10 12-243 10 11 12 01. 10% note to be iss7ued January 2.000 c.000 d.000 111. P500. 215. 2001.000 b.000 1.10 (12 working days) Subscription to Tax Reporting Service for 2011 Utilities for December 2010 Merchandise. received 12. 143. 2010 c.500.000 d. The bonds payable is 10-year.000.000 is due April 30.20.000.10 12.000 b. As of December 31.20.10 12.000 Notes payable – bank 800.28.000 Interest payable Mortgage notes payable – 10% Mortgage notes payable – 12% Bonds Payable ? 600.000.000 29.10 12.

11 Interest on bank loan.000 April 1. The maturities of these notes are given in the schedule below.13 01.000 72.11 Manufacturing royalties December 2010 Merchandise. 2013 1. 10-12-10 to 021. 2010 300. 2014 – March 31. received 01.11 01.12.000. 2015 – March 31. 2013 – March 31. shipped FOB shipping point.000 P 7. 2010 P 400. BONDS PAYABLE Feel Na Feel issued P10. 2010 PAYROLL RELATED ITEMS Merchandise.000 October 1. goods and services purchased on open account amount to P740.15.000 Dividends payable 160. 2008.11.000 The accrues payroll.000 July 1.000 ESTIMATED WARRANTIES Feel Na Feel has a one-year product warranty on some selected items in its product line.13.14. 2010 based on your review of the data given above.11 01-008 01-009 01-010 01-011 Payroll. The bonds will mature on July 1.11 01.12.11 Manufacturing equipment installed on 12.21.11.000 Warranty claims honored on 2009-2010 sales 178. received 01. 12.2010. REQUIRED: Prepare adjusting entries as of December 31. Feel Na Feel uses the effective interest rate method to amortize bond premium or discount NOTES PAYABLE Feel Na Feel has signed several long-term notes with financial institutions.000 OTHER INFORMATION TRADE PAYABLES Accounts payable for supplies. 2011 Merchandise.000 as March 31.000 Inventory 39.March 31. has been producing quality reusable adult diapers for more than two decades. 2010 Due Date Amount Due April 1.000 of 10% bonds on July 1.11 01-004 14 01.11 01.05. INC.000 Manufacturing cost Inventory 9.03. shipped FOB destination. received 01. 12. The following information relates to the obligations of Feel Na Feel as of March 31.000.11 01-006 01-007 17 18 19 20 01.000 Total warranty claims honored P 358.000 on March 31.15. 2011. The company’s fiscal year runs from April 1 to March 31.000 . 2016 1.000. 01.10. 2018.000 Repairs and maintenance Interest Expense Machinery and equipment Dividends payable Accrued interest payable Accrues royalties payable 26. 2014 1.24.667 39.000 30.11 Accrued Salaries and wages P 300. 2010 600.02.29.000 April 1. 01.10 to 01. 2009 amounted to P180. through March 31. The warranty cost on sales made from April 1 2009.11 (12 working days in total.09. accrued interest payable.15. The prevailing market rate of interest for these bonds was 12% on the date issue. 2012300. Interest is paid semiannually on July 1 and January 1.000 254.11 01-005 15 16 01. received 01.200.000 April 1 2011 .11 01. 2010 were as follows: Accrued payroll P 48.000 38.000 160.10. 2010.10.10 Dividends declared.11 Maintenance e services.000.000.02. are estimated as P520.05.10.000 April 1. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows: Warranty claims honored on 2008-2009 sales P 180. The total unpaid interest for all of these notes amounts to P600. 4 working days in Jan. 2012 – March 31.10 Accrues liabilities as December 31. 2015 800.000 Salaries and wages 64. shipped FOB destination.000. PROBLEM NO 4 FEEL NA FEEL.05. 12. The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31.000 April 1. and accrued royalties payable accounts were reversed on January 1.

647. P1. P1. 1.800 b. 2010.000 of its 5-year. 5. 5 On January 1.960 PROBLEM NO.000 10.500 6-years. 2.844.000 bonds.000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9%. 14. determine the following: (Round off present value factors to four decimal places. 4. 10% convertible bonds at pat.000. an investor in Wizards convertible bonds tendered 1. 2010. The 2. P2. P14.374.000 face value bonds on December 31. P2.00 per share Number of shares issued and outstanding 6.000 c.172.389. 3.400 b. 5. P8.336. 121.000 b.615. 2009 is a.485.000. 6 The following data were obtained from the initial audit of BIBI COMPANY: 15%.352. 10.000 c. P5. which had a fair value of P105 and a par value of P1 at the date of conversion. 2010 will increase APIC by a.00 per share 3/31/ 2010 21. Based on the above and the result of your audit.377.044 P1. Feel Na Feel’s board of directors declared a cash dividend of P0. 2009 Balance Cash proceeds from issue on January 1.000 d.000 c.000. On March 31. P4. 4.000 5-year. 10 year.500 b.000 b.000. 5. The market rate of interest on the date of issue was 12% Bond Interest Expense Cash paid.000.898.000 5-year.50 per share 1.000 face value bonds on July 1.642.980. 10. 2010.) 1. WIZARDS CORPORATION issued 2. to the common stockholders of record at the close of business on march 31.000 face value bonds in January 1.000.000 as of March 31.400 The conversion of the 1.400 d.129. 1. 2009 is a.000 face value bonds on December 31.147. P1.155.350 b. 2. 1/2/10 Debit Credit P 1.Withholding taxes payable Other payroll deductions 94. Both dividends were to be distributed on April 12. 2. P1. bonds payable.000 face value. How much was received by Feel Na Feel from the bonds issued on July 1.000 6 year. P20.386.783 d.697 PROBLEM NO. Wizards issued 5.172. 4. P1. Interest is payable every June 30 and December 31. Feel Na Feel’s statements of financial position would report total current liabilities of a. 2008? a. 14. The issue price on the 2. 2010.605.000 c.217 c.875 d. 2010.000 shares Market Values of Common Stock: 3/15/2010 P 22.20 per common share and a 10% common stock dividend. 4. 2009 of 1.500 bonds for conversion into 15. 14.000 d.50 per share 4/12/ 2010 22. 2009. Interest is payable each December 31.000 P 75.000 c.252. Data regarding Feel Na Feel common stock are as follows: Per Value P 5.000 b. 2009 is a. 2. the prevailing market interest rate for similar debt without the conversion option is 12%.040 2. On the date of issue. Feel Na Feel’s statement of financial position would report total noncurrent liabilities of a.415.000 .000 3.732. 10.044 P 75.100 The gain on early retirement of bonds on December 31. P1.000 d.121. On July 1. P1. Wizards uses the effective interest method of amortization. P1.370. 1.286. On March 31. On December 31. 2.000 c.000 MISCELLANEOUS ACCRUALS Other accruals not separately classified amount to P150. 2009.500. dated January 1.000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1.800 The carrying value of the 2. 201.054 d. 2010 DIVIDENDS On march 15. 2010. 112. 5. 0 The carrying value of the 5.000 of its P1.960 b.852. 1.200 d.500 c.000 shares of Wizards common stock.000 plus accrued interest. 2010 is a. On July 1.

000 P 265. Carrying value of bonds payable at December 31.000 at December 31. 2010 a.683 b. of any cost or damages that may be [payable to the plaintiffs. 921. 3.000 d. In calculating its warranty provision for December 31. 60. Relevant extracts from its financial statements at December 31. the following occurred: 1. P831.110 b. if any. 160.266 c.000 150. 4.000 2.000 225.826 PROBLEM 7 NUGGETS CORPORATION manufactures and sells food products and food processing machinery.000 Expected % of products sold during 2008 having no defects in 2010 80% Expected & of products sold during 2008 having minor defects in 2010 15 % Expected & of products sold during 2008 having Major defects in 2010 5% -those with minor defects all in 2010 Expected timing of settlement of warranty payments 40% in 2010 -those with major defects 60% in 2010 During the year ended December 31.000 c. 2010 a.000. 1/1/10 Accrual.745 d.000 was for products with major defects.000 b.500 Bond Interest Expense for the year ended December 31.000 75. 34.000 Noncurrent liabilities Provision Provision for warranties P180. 800. P150.000 Expected % of products sold during 209 having no defects in 2011 85% Expected % of products sold during 2009 having minor defects in 2011 13% . 1398.000 d. NUGGETS strenuously denies the allegation and . Its reporting date is December 31.683 c. Of the amount paid.000 Note 36-Contigent Liabilities NUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums.151. Loss on Bond redemption a. 1. 2010. 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year.000.174 c.000 P 75. 2009 are as follows: Current liabilities Provision Provision for warranties P270.000 75. In a relation to the warranty provision of P450.000 b.000. is unable to estimate the financial effect. 12/31/10 Accrued Interest on Bonds Balance.583 d.000 was paid out of the provision. 2010. as at the same date authorizing the financial statements for issue. P200. P75.000 75. 12/31/10 Treasurer bonds Redemption price and interest to date on 200 bonds permanently retired on 12/31/10 Based on the preceding information. Estimated cost of repairs – Products with minor defects P 1. P19.000 Estimated cost of repairs – Products with minor defects P 6. all of which related to amounts that had been expected to be paid in 2010.000 was for products with minor defects and P50.000 150.000 P 265. determine the following: 1. 15. 2. P150.Cash paid. 52. 69. 2010 a. P4. 7/1/10 Accrual. 2009. 135. The provision for warranties at December 31. NUGGETS made the following adjustment to the assumptions used for the prior year: Estimated cost of repairs-products with minor defects no change Estimated cost if repairs – products with major defects P 5.000 P 75.683 Accrued Interest on Bonds at December 31.

The warranty expense in 2010 is a. 410. 2010 is a. the court found in favor of NUGGETS. Completeness b. .200.500 the purchase order was date after receipt of goods.000 c. 150. The carrying amount of the conveyor belt at December 31. 5. 410. P580. 2009 was P140.000 2.000 c. Which of the following procedures is least likely to be performed before the balance sheet date? a. ChapaChocs was in a strong financial position at 31 December 2010 Based on the above and the result of your audit. c.000 NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above.000 3. 4. P480. 1. ChapaChocks Ltd. 150. 5. ChapaChocs’ loan with Choko Bank was P3.000 c. in October 2010. Observation of inventory count. 480. Existence c.000 b. 80.000 to the plaintiffs. P.000 d. d.000 b.000. An analytical procedure d. 400.000 b. The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue. Canceled checks b. NUGGETS estimated that it would receive about P425.000 5.5000.000 PROBLEM NO 8 Select the best answer for each of the following: 1. The population for this test consist of all a. 2010 is a. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary. The primary audit test to determine if accounts payable are valued properly is a. Confirmation of receivables. The provision for warranties to be reported as noncurrent liability as of December 31.000 b. Vouching accounts payable to supporting documentation c. 230. The provision for warranties as of December 31. Valuation and allocation 2. 160. 230. answer the following: 1. 4.000 c. The purchasing agent had forgotten to issue the purchase order. receiving reports 3. Presentation and disclosure d. 2010 is a.000. a disbursement of P450 for materials did not have receiving report. 2010 is a. 400. 330.000 d. P100. Search for unrecorded liabilities. 330. NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1. As at December 31. e.360.000. An auditor performs a test to determine whether all merchandise for which the client was billed was received.000 4.Expected % of products sold during 2009 having major defects in 2011 -those with minor defects Expected timing of settlement of warranty payments -those with major defects 3. 1.000 d. a. Its original cost was P200. Testing of internal control over cash.000. b. Verification that accounts payable was reported as a current liability in the balance sheet. 6.180.000 b. Also. An audit assistant found a purchase order for a regular supplier in the amount P 5. 220. 2% all in one 2011 20% in 2011 80% in 2012 NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011 at an estimated cost of P250. 2010. Confirmation of accounts payable b. Merchandiser received c.000 as at December 31. The provision for warranties to be reported as current liability as of December 31. In Auditing accounts payable. NUGGETS had paid P800.000 c.000 d.000 d. Total provisions to be reported in the statement of financial position as of December 31. P260. Vendor’s invoices d. The audit director should. 2010. an auditor procedures most likely will focus primarily on managements assertion of.

d. Journal c.a. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. Analysis and recomputation of interest expense b. b. Unrecorded liabilities are most likely to be found during the review of which of the following documents? a. b. c. Invoices. Which of the following audit procedures is least likely to detect an unrecorded liability? a. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports. Confirming accounts payable balances with know suppliers who have zero balances. Which of the following is a substantive test than an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable? a. d. Which of the following audit procedures is best for identifying unrecorded trade accounts payable? a. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. unopened. Receiving the client’s mail. The false statements is that a. Vendors with whom the entity has previously done business b. Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date 13. Quantity C. When using confirmation to provide evidence about completeness assertion for account payable. Test footings in the accounts payable ledger . Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers b. Payees of checks drawn in the month after the year end. Requisitions d. Unmatched sales invoice 12. d. 8. As compared with the confirmation of accounts receivable. c. When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the a. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees a. Reading of the minutes of meetings of the board of directors 11. Terms 10. for a reasonable period of time after year end to search for unrecorded vendor’s invoices c. Shipping records d. Analysis and recomputation of depreciation expense. Quality d. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for. d. b. 9. 7. In verifying debits to perpetual inventory records of nonmanufacturing firm. d. Invoices filed in the entity’s open invoice file. bills of lading b. Order b. c. the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date. d. It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date. Unpaid bills c. the appropriate population most likely is a. Disagree with the assistant because two problems have an equal risk of loss associated with them Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it. 14. Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. Price b. Amounts recorded in the accounts payable subsidiary ledger c. Mailing of standard bank confirmation forms. 6. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ] c. the auditor is most interested in examining the purchase a.

An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about a. an auditor expects the trust indenture to include the a. Effective yield of the bonds issued c. Description on the collateral 18. In auditing long-term bonds payable. Valuation 16. Com[pare interest with the bond payable amount for reasonableness d. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because a. Confirm the existence of individual bondholders at year-end 19. In an audit of bonds payable. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available d. an auditor most likely will a. c. Presentation and disclosure d. Reconcile unpaid invoices to vendors statements Prepare a schedule of accounts payable Mail confirmation for selected account balances 15. An auditors program to audit long-term debt should include steps that require a. Examination of trade accounts payable . Inspecting the accounts payable subsidiary ledger c.b. Examining bond trust indentures b. Verification of contingent liabilities. Subscription list d. c. Accrued liabilities at year end will become account payable during the following year 20. c. b. 17. The auditor is most likely to verify accrued commissions payable in conjunction with the a. Examine documentation of assets purchased with the bond proceeds or liens c. Existence c. Investigating credits to the bond interest income account d. Sales cutoff test. d. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction b. Auditee’s debt-to-equity ratio at the same time of issuance b. Review of post-balance sheet date disbursements. Perform analytical procedures on the bond premium and discount accounts b. Verifying the existence of the bondholders. Accrued liability balances are less material than account payable balances. d. Completeness b.