Professional Documents
Culture Documents
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 companys general ledger. An analysis of the account disclosed the following:
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.
A. P 1,471,000 B. P 1,614,000
C. P 1,214,000 D. P 1,477,000
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
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.
Problem 2
You were able to obtain the following from the accountant for Maverics Corp. Related to the companys liability as of December 31, 2010.
Problem no. 3
In conjunction with your firms examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher
register the information shown in the working paper below.
REQUIRED:
Prepare adjusting entries as of December 31, 2010 based on your review of the data given above.
PROBLEM NO 4
FEEL NA FEEL, INC. has been producing quality reusable adult diapers for more than two decades. The companys fiscal year runs from April 1 to March 31.
The following information relates to the obligations of Feel Na Feel as of March 31, 2010.
BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12% on the date issue. The bonds
will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. 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. The maturities of these notes are given in the schedule below. The total unpaid
interest for all of these notes amounts to P600,000 on March 31, 2010
Feel Na Feel has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2008-
2009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000. The warranty cost on sales made from April 1 2009, through March
31,2010, are estimated as P520,000. The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows:
Warranty claims honored on 2008-2009 sales P 180,000
Warranty claims honored on 2009-2010 sales 178,000
Total warranty claims honored P 358,000
OTHER INFORMATION
1. TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010
3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2010
4. DIVIDENDS
On march 15, 2010, Feel Na Feels board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend.
Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010. Data
regarding Feel Na Feel common stock are as follows:
Per Value P 5.00 per share
Number of shares issued and outstanding 6,000,000 shares
PROBLEM NO. 5
On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate
(yield) of 9%. Interest is payable each December 31. Wizards uses the effective interest method of amortization. On December 31, 2010. The 2,000 bonds
were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest. On July 1, 2009, Wizards issued 5,000 of its
P1,000 face value, 10% convertible bonds at pat. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest
rate for similar debt without the conversion option is 12%. On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion
into 15,000 shares of Wizards common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.
Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.)
1. The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 is
a. P2,155.500 b. P2,000,000 c. 1,844,400 d. 2,147,800
2. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 is
a. 1,898,400 b. 2,129,500 c. 2,000,000 d. 2,121,100
3. The gain on early retirement of bonds on December 31, 2010 is
a. P20,000 b. 112,000 c. 121,200 D. 0
4. The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is
a. P4,605,800 b. 5,000,000 c. 4,732.875 d. 4,615,400
5. The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by
a. P1,485,000 b. 1,374,000 c. 1,415.054 d. P1,377,697
PROBLEM NO. 6
The following data were obtained from the initial audit of BIBI COMPANY:
PROBLEM 7
NUGGETS CORPORATION manufactures and sells food products and food processing machinery. Its reporting date is December 31. Relevant extracts from its
financial statements at December 31, 2009 are as follows:
Current liabilities
Provision
Provision for warranties P270,000
Noncurrent liabilities
Provision
Provision for warranties P180,000
The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior
year.
During the year ended December 31, 2010, the following occurred:
1. In a relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision. Of the amount paid, P150,000
was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be
paid in 2010/
2. In calculating its warranty provision for December 31, 2010, 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 5,000,000
Expected % of products sold during 209 having no defects in 2011 85%
Expected % of products sold during 2009 having minor defects in 2011 13%
Expected % of products sold during 2009 having major defects in 2011 2%
-those with minor defects all in one 2011
Expected timing of settlement of warranty payments 20% in 2011
-those with major defects 80% in 2012
3. 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 P250,000. The carrying amount of the conveyor belt at December 31, 2009 was
P140,000. Its original cost was P200,000
4. NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs. As at December 31,
2010, NUGGETS had paid P800,000
5. 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, in October 2010, the court found in favor of NUGGETS. The hearing for damages had not been scheduled as at the date the financial
statement for 2010 were authorized for issue. NUGGETS estimated that it would receive about P425,000.
6. NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS
subsiadiary, ChapaChocks Ltd. ChapaChocs loan with Choko Bank was P3,200,000 as at December 31, 2010. ChapaChocs was in a strong financial
position at 31 December 2010
Based on the above and the result of your audit, answer the following:
PROBLEM NO 8
1. In Auditing accounts payable, an auditor procedures most likely will focus primarily on managements assertion of.
a. Existence c. Completeness
b. Presentation and disclosure d. Valuation and allocation
2. An auditor performs a test to determine whether all merchandise for which the client was billed was received. The population for this test
consist of all
a. Merchandiser received c. Canceled checks
b. Vendors invoices d. receiving reports
3. The primary audit test to determine if accounts payable are valued properly is
a. Confirmation of accounts payable
b. Vouching accounts payable to supporting documentation
c. An analytical procedure
d. Verification that accounts payable was reported as a current liability in the balance sheet.
4. Which of the following procedures is least likely to be performed before the balance sheet date?
a. Observation of inventory count.
b. Testing of internal control over cash.
c. Search for unrecorded liabilities.
d. Confirmation of receivables.
5. An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods. The
purchasing agent had forgotten to issue the purchase order. Also, a disbursement of P450 for materials did not have receiving report. The
assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report. The audit director
should.
a. Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report
exception
b. Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report
didnt happen very often.
c. Disagree with the assistant because two problems have an equal risk of loss associated with them
d. Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it.
6. When using confirmation to provide evidence about completeness assertion for account payable, the appropriate population most likely is
a. Vendors with whom the entity has previously done business
b. Amounts recorded in the accounts payable subsidiary ledger
c. Payees of checks drawn in the month after the year end.
d. Invoices filed in the entitys open invoice file.
7. 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. Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for.
b. Receiving the clients mail, unopened, for a reasonable period of time after year end to search for unrecorded vendors invoices
c. Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports.
d. Confirming accounts payable balances with know suppliers who have zero balances.
8. Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts
receiving with debtors is false. The false statements is that
a. Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable
with suppliers
b. Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts
receivable ]
c. As compared with the confirmation of accounts receivable, 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.
9. 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. Quantity C. Price
b. Quality d. Terms
10. Which of the following audit procedures is least likely to detect an unrecorded liability?
a. Analysis and recomputation of interest expense
b. Analysis and recomputation of depreciation expense.
c. Mailing of standard bank confirmation forms.
d. Reading of the minutes of meetings of the board of directors
11. Unrecorded liabilities are most likely to be found during the review of which of the following documents?
a. Unpaid bills c. bills of lading
b. Shipping records d. Unmatched sales invoice
12. Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a. Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the
prior period.
b. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported
by receiving reports.
c. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
d. Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date,
13. In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase
a. Journal c. Order
b. Requisitions d. Invoices.
14. Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients
employees
a. Test footings in the accounts payable ledger
b. Reconcile unpaid invoices to vendors statements
c. Prepare a schedule of accounts payable
d. Mail confirmation for selected account balances
15. 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. Existence c. Completeness
b. Presentation and disclosure d. Valuation
16. An auditors program to audit long-term debt should include steps that require
a. Examining bond trust indentures
b. Inspecting the accounts payable subsidiary ledger
c. Investigating credits to the bond interest income account
d. Verifying the existence of the bondholders.
17. In an audit of bonds payable, an auditor expects the trust indenture to include the
a. Auditees debt-to-equity ratio at the same time of issuance
b. Effective yield of the bonds issued
c. Subscription list
d. Description on the collateral
18. In auditing long-term bonds payable, an auditor most likely will
a. Perform analytical procedures on the bond premium and discount accounts
b. Examine documentation of assets purchased with the bond proceeds or liens
c. Com[pare interest with the bond payable amount for reasonableness
d. Confirm the existence of individual bondholders at year-end
19. The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because
a. Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction
b. Accrued liability balances are less material than account payable balances.
c. Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available
d. Accrued liabilities at year end will become account payable during the following year
20. The auditor is most likely to verify accrued commissions payable in conjunction with the
a. Sales cutoff test.
b. Verification of contingent liabilities.
c. Review of post-balance sheet date disbursements.
d. Examination of trade accounts payable
Suggested Answers
Problem 1 Problem 8
1. D 1. C
2. C 2. B
3. A 3. C
4. B 4. C
5. A 5. D
Problem 2 6. A
1. B 7. C
2. A 8. B
3. C 9. B
4. D 10. B
Problem 3 11. A
Adjusting entries 12. A
13. D
Problem 4 14. C
1. A 15. D
2. A 16. A
3. C 17. D
18. C
Problem 5 19. A
1. A 20. A
2. B
3. C
4. A
5. B
Problem 6
1. D
2. B
3. C
4. C
5. D
6. A
7. C
Problem 7
1. C
2. D
3.
4. A
5. B
Accountancy Department
College of Business and Accountancy
Notre Dame University
Cotabato City, Philippines
1. The Stock Investment showed the following details during year 2008
Debit Credit
Jan. 1 Audited balance 4,000shares P80,000
Feb. 28 Cash dividend 2,000
Mar. 31 Bought shares 9,000
Apr. 1Sale of rights 6,000
June 30 Sale of shares 10,000
1. A cash dividend of P0.50 per share were received on Feb. 28. The adjusting entry (assuming the use of the cost method) is:
2. On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share. Market values on this date
were: shares, P20; rights, P5. The adjusting entry to recognize the cost allocated to the rights is:
4. On April 1, the remaining rights were sold for P6, 000. The adjusting entry is:
5. On June 30, 460 shares were sold for P10, 000. Using the average cost method, the adjusting entry is:
a. Cash 10,000
Stock investment 7,500
Gain on sale of stock 2,500
b. Stock investment 10,000
Gain on sale of stock 10,000
c. Stock investment 2,500
Gain on sale of stock 2,500
d. None of the above
The following were found in your examination of the interplant accounts between the Home Office and Esperanza Branch.
a. Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the branch.
b. P10,000 covering marketing expenses of another branch was charged by Home Office to Esperanza.
c. Esperanza recorded a debit note on inventory transfers from Home Office of P75,000 twice.
d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from Upi Branch.
e. Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500. Home Office debited that this charge is appropriately Upi
Branchs cost.
f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650.
6. The net adjustment in the Home Office books related to the Esperanza Branch current amount is:
a. P75,700
b. 65,700
c. 86,200
d. 94,820
7. The net adjustment in Esperanzas books related to the Home Office account is:
a. P33,335
b. 31,450
c. 20,950
d. 10,450
8. Before the above discrepancies were given effect, the balance in the Home Office books of its Esperanza Branch Current account was debit balance of
P165, 920. The unadjusted balance in the Esperanza Branch books of its Home Office Current account must be:
a. P92,336
b. 98,230
c. 104,500
d. 111,170
page 2
a. P84, 807
b. 90, 220
c. 99, 200
d. 109, 120
The following information pertains to Leila Mas Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during
the year.
Debit Credit
Cash P 102, 400
Accounts receivable 64, 800
Inventory, 12/31/2007 248, 000
Furniture & fixtures 472, 800
Land improvements 180, 000
Accumulated depreciation, 12/31/2007 P129, 600
Accounts payable, 12/31/2007 68, 000
Leila Maes, Drawings
Leila Maes, Capital, 12/31/2007 498, 400
Sales 2, 612, 000
Purchases 1, 220, 400
Salaries 696, 000
Payroll taxes 49, 600
Insurance 34, 800
Rent 136, 800
Utilities 50, 400
Living expenses 52, 000
Leila Maes has developed plans to extend into wholesale flower market and is in the process of negotiating a bank loan to finance the expansion. The
bank is requesting 2008 financial statements prepared on the accrual basis of accounting from Leila Maes. During the course of a review engagement,
Marion, Leila Maes accountant, obtained the following additional information.
1. Amounts due from customers totaled P128, 000 at December 31, 2008.
2. An analysis of the above receivables revealed that an allowance for uncollectible accounts of P15, 200 should be provided.
3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at December 31, 2008, and December 31, 2007, respectively.
4. The inventory totaled P291, 200 based on a physical count of the goods at December 31, 2008. The inventory was priced at cost, which approximates
market value.
5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive insurance coverage for 1 year. The premium on the previous policy, which
expired on April 30, 2008, was P31, 200.
6. On January 2, 2008, Leila Mae entered into 25-year operating lease for the vacant lot adjacent to Barons retail store for use as a parking lot. As agreed
in the lease, Leila Mae paved and fenced in the lot at a cost P180, 000. The improvements were completed on April 1, 2008, and have an estimated
useful life of 15 years. No provision for depreciation or amortization has been recorded. Depreciation on furniture and fixtures was P48, 000 for 2008.
2000 2001
Utilities P3, 600 P 6, 000
Payroll taxes 4, 400 6, 400
P8, 000 P12, 400
page 3
8. Leila Mae is being sued for P16, 000. The coverage under the comprehensive insurance policy is limited to P1, 000, 000. Leila Maes attorney believes
that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000.
9. The salaries account includes P16, 000 per month paid to the proprietor. Leila Mae also receives P1, 000 per week for living expenses.
Required: You are to convert the balances of the nine (9) accounts below to the accrual basis.
a b c d
10. Accounts receivableP64, 800 P63, 200 P128, 000 P192, 800
11. Inventory 291, 200 248, 000 43, 200 334, 400
12. Accounts payable 54, 000 68, 000 122, 000 176, 000
13. Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200
14. Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 000
15. Salaries 888, 000 696, 000 600, 000 504, 000
16. Payroll taxes 51, 600 47, 600 49, 600 50, 000
17. Insurance 34, 800 33, 600 36, 000 35, 000
18. Utilities 50, 400 48, 000 50, 000 52, 800
The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus accrued interest. The bonds were dated July 1, 2001; interest
payable semiannually on January 1 and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible
into P10 par value common stock as follows.
Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond.
From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000 bond.
After June 30, 2009, at the rate of 4 shares for each P1, 000 bond.
The bonds mature 10 years from their issue date. The company adjusts its books monthly and closes its books as of December 31 each year.
2008
Dec. 31 P1, 000, 000 face value of bonds were reacquired
at 99-1/4 plus accrued interest. These were
immediately retired.
2009
July 1 The remaining bonds were called for redemption
and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97.
These bonds are dated July 1, 2009, and are due in 20 years.
19. What are the carrying value of bonds payable at December 31, 2001?
21. In recording the bond conversion on July 1, 200, how much should be credited to the additional paid-in capital account?
23. What is the carrying value of the bonds reacquired on December 31, 2008?
24. What is the gain (loss) on bond reacquisition on December 31, 2008?
BLUE ICE COMPANYS stockholders equity account balance at December 31, 2008 were as follows:
The following 2009 transactions and other information relate to the stockholders equity accounts:
a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares were issued and outstanding.
b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to hold as treasury stock. The shares were originally issued
at P15 per share. BLUE ICE uses the cost method to account for treasury stock. Treasury stock is permitted in BLUE ICEs state of incorporation.
c. On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory. The inventory had a P75, 000 carrying value and a P60, 000 fair
market value.
d. On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of BLUE ICEs common stock at P18 per share, which was
the market on that date. The option may be exercised all 20, 000 options when the market value of the stock was P25 per share. BLUE ICE issued new
shares to settle the transaction.
e. BLUE ICEs net income for 2009 was P240, 000.
Instruction: Based on the information above and other analysis as necessary, answer the following question.
27. BLUE ICEs Common Stock balance at December 31, 2009 is;
30. BLUE ICEs Treasury Stock balance at December 31, 2009 is;
a. P50, 000 c. P0
b. P75, 000 d. P125, 000
page 5
31. BLUE ICEs Stockholders Equity balance at December 31, 2009 is;
Information pertaining to LETICIA COMPANYS property, plant and equipment for 2009 is presented below.
Debit Credit
Land 6, 000, 000
Buildings 48, 000, 000
Accum. Depreciation Bldg. 10, 524, 000
Machinery and equipment 36, 000, 000
Accum. Depreciation Mach/Equip. 10, 000, 000
Automotive equipment 4, 600, 000
Accum. Depreciation Auto. Equip. 3, 384, 000
Depreciation data:
Depreciation Useful
Method Life
Building 150% declining balance 25 years
Machinery/Equip. SLM 10 years
Automotive Equip. SYD 4 years
Leasehold improvements SLM -
On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-old car with a cost of P720, 000 and a book value of P216,
000. The new car has a cash price of P960, 000; market value of the trade-in is not known.
On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The
related lease terminates on December 31, 2008.
On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000,
000 for installation were incurred.
LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at January 1, 2009, would have been depreciated at a total
amount of P720, 000 for the year ended December 31, 2009.
Instruction: Based on the information above and other analysis as necessary, answer the following question:
33. What is the book value of the building at December 31, 2009?
page 6
36. What is the balance of the accumulated depreciation machinery and equipment at December 31, 2009?
40. What is the book value of leasehold improvements at December 31, 2009?
St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009.
The following additional information is available in the first year after the acquisition.
1. During 2009, St. John sold merchandise to St. Therese that originally cost St. John P15, 000, and the sale was made for P20, 000. On December 31, 2008,
St. Thereses inventory included merchandise purchased from St. John at a cost to St. Therese of P12, 000.
2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese. St. Therese uses normal markup of 25% above cost. St. Johns ending
inventory includes P10, 000 of the merchandise acquired from St. Therese.
3. St. Therese reduced its intercompany account payable to St. John to a balance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on
December 30. This P1, 000 payment was still in transit on December 31, 2009.
4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000. The equipment was originally purchased by St. John for P5, 000 and had a
book value of P4, 000 at the date of sale to ST. Therese. The equipment had an estimated remaining life of 4 years as of January 2, 2009.
5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the outstanding bonds issued by St. John. The bonds mature on December 31, 2005,
and were originally issued at par. The bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately
before St. Thereses purchase of bonds.
QUESTION:
41. What is the eliminating entry for the Equity in subsidiarys income and dividends declared by the subsidiary?
a. Equity in subsidiarys income 8, 460
Investment in stock of St. Therese 8, 460
b. Equity in subsidiarys income 8, 460
Dividends declared St. Therese 3, 600
Investment in stock of St. Therese 4, 860
c. Equity in subsidiarys income 12, 060
Investment in stock of St. Therese 12, 060
d. No Eliminating Entry
42. What is the eliminating entry for St. Thereses stockholders equity?
a. Capital stock St. Therese 45, 000
Additional paid-in capital St. Therese 13, 500
Retained earnings St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600
b. Capital; stock St. Therese 45, 000
Additional paid-in capital St. Therese 13, 500
Retained earnings St. Therese 36, 900
Investment in stock of St. Therese 95, 400
c. Capital stock St. Therese 50, 000
Additional paid-in capital 15, 000
Retained earnings St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460
d. Capital stock St. Therese 50, 000
Additional paid-in capital St. Therese 15, 000
Retained earnings St. Therese 46, 400
Investment in stock of St. Therese 111, 400
43. To eliminate the sales made by St. John to St. Therese, the entry is:
44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume that Equity in subsidiary income has not been recorded by parent)
a. Sales 18, 000
Inventory 2, 000
Cost of sales 16, 000
b. Sales 18, 000
Investment in stock of St. Therese 1, 600
Retained earnings St. Therese 400
Cost of sales 18, 000
Inventory 2, 000
c. Sales 18, 000
Retained earnings 2, 000
Cost of sales 18, 000
Inventory 2, 000
d. Sales 18, 000
Inventory 2, 000
Cost of sales 20, 000
45. To record the items in transit and to eliminate the inter-companys payable/receivable, the entry is:
a. Accounts payable 4, 000
Accounts receivable 4, 000
b. Accounts receivable 4, 000
Cash 1, 000
Accounts payable 5, 000
c. Cash 1, 000
Accounts payable 3, 000
Accounts receivable 4, 000
d. Cash 1, 000
Accounts payable 4, 000
Accounts receivable 5, 000
46. To eliminate the acquisition made by St. Therese from St. John, the entry is:
a. Equipment 2, 000
Accumulate depreciation 1, 000
Gain on sale of equipment 3, 000
b. Gain on sales of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 250
Depreciation expense 750
c. Gain on sale of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 1, 000
d. Gain on sale of equipment 3, 000
Equipment 2, 000
Depreciation expense 1, 000
47. The depreciation recorded by St. John at December 31, 2009 is:
a. Overstated by P750 c. Overstated by P1, 750
b. Overstated by P250 d. Understated by P1, 000
48. The entry to eliminate the bonds purchased by St. Therese from St. John is:
a. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Gain on extinguishments of debt 6, 000
b. Investment of St. John 44, 000
Loss on extinguishments of debt 6, 000
Bonds payable 50, 000
c. Bonds payable 44, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
d. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
page 9
For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST.
49. What is the eliminating entry for the Equity in subsidiarys income and dividends declared by the subsidiary?
a. Equity in subsidiarys income 8, 460
Investment in stock of St. Therese 8, 460
b. Equity in subsidiarys income 8, 460
Dividends declared St. Therese 3, 600
Investment in stock of St. Therese 4, 860
c. Equity in subsidiarys income 12, 060
Investment in stock of St. Therese 12, 060
e. No eliminating Entry
50. What is the eliminating entry for St. Thereses stockholders equity?
a. Capital stock St. Therese 45, 000
Additional paid-in capital St. Therese 13, 500
Retained earnings St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600
b. Capital stock St. Therese 45, 000
Additional paid-in capital St. Therese 13, 500
Retained earnings St. Therese 36, 900
Investment in stock of St. Therese 95, 400
c. Capital stock St. Therese 50, 000
Additional paid-in capital St. Therese 15, 000
Retained earnings St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460
d. Capital stock St. Therese 50, 000
Additional paid-in capital St. Therese 15, 000
Retained earnings St. Therese 46, 400
Investment in stock of St. Therese 111, 400
Page 10
Punongbayan & Araullos Auditing Problems Quiz
EASY
1. On July 01, 2007, one of FLOYD INC.'S delivery trucks was destroyed in an accident. On that date, the truck's book value was P900,000. On July 15,
2007, FLOYD INC. received and recorded a P42,000 invoice for a new engine installed in the truck in May 2007 and another P6,000 invoice for various
repairs.
What amount should FLOYD INC. use to determine the gain or loss on disposal of the truck?
a.P900,000 b.P942,000 c.P948,000 d.P936,000
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled P15,000.
What is the amount of cash disbursements per books in April?
a.P 89,200 b.P 99,400 c.P109,600 d.P114,400
3. BRAND CO. reported P9,000 of net income for 2007. The correct net income however was P11,000. It was determined that the ending inventory was
overstated by P1,000.
The only other error was with the beginning inventory which must have been:
a. Understated by P1,000 b. Understated by P3,000
c. Overstated by P1,000 d. Overstated by P3,000
4.* On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500; terms net 30, FOB Shipping Point. The sale which
is 125% of cost was recorded in January 2007 when the check was received from the customer. Ending inventory was determined by physical count on
December 31, 2007.
As a result of the above transactions, SWIFT CO.s cost of goods sold for the year ended December 31, 2007 was:
a. Understated by P3,000 b. Overstated by P30,000
c. Overstated by P37,500 d. Correctly stated
5. BART Company started operations on January 01, 2008. The following are available as of June 30, 2008:
Purchase of merchandise P 450,000
Inventory, June 30, 2008 75,000
Goods were sold at 50% above cost; 75% ofsales were on account
Estimated bad debts 1% of credit sales
Collections from charge customers 315,000
Allowance for doubtful accounts, June 30,2008
after write off of uncollectible accounts 3,903.75
6. PRIME Co. received from a customer a one year, P500,000 note bearing annual interest of 8%. After holding the note for six months, PRIME discounted
the note at Asian Bank at an effective interest rate of 10%.
At the date of discounting, PRIME should recognize
a. P 40,000 interest revenue b. P23,810 interest revenue
c. P13,000 interest revenue d. P 4,762 interest expense
7. Information pertaining to Trace Company for the month of August appears below:
Balance per bank statement P 310,000
Balance per books 187,500
Deposit in transit 70,000
Service charges 2,500
Note collected by bank 75,000
Outstanding checks ?
An analysis of the cancelled checks returned with the bank statement reveals the following:
a. Check for the purchase of merchandise was drawn for P155,000 but was recorded as P150,000.
b. The management wrote a check for traveling expenses of P25,000 while out of town. The check was not recorded.
What is the amount of outstanding checks on August 31, 2006?
a.P150,000 b.P140,000 c.P125,000 d.P230,000
8. The inventory on hand on December 31, 2006 of LEISA CORP. is valued at a cost of P300,000. The following items were not included in the inventory:
a. Purchased goods in transit shipped FOB Destination, with price of P30,000 which included freight charge of P5,000.
b. Goods held on consignment by LEISA CORP. at a sales price of P10,000, excluding a 20% commission on the sales price. Freight paid by LEISA
CORP. was P1,000.
c. Goods sold in transit FOB Destination with invoice price of P49,000 which included freight charge of P4,000 to deliver the goods.
d. Purchased goods in transit FOB Shipping Point with invoice price of P60,000. Freight costs amount to P6,000.
Goods out on consignment with sales price of P30,000. Shipping costs amounts to P3,000.
What is the correct inventory on December 31, 2006 assuming LEISAs selling price is 150% of costs?
a.P419,000 b.P416,000 c.P410,000 d.P 17,500
9. In analyzing the shareholders equity section of the PEARSON CORP. The following information was abstracted from the accounts at December 31,
2007:
AVERAGE
1. While preparing its 2008 financial statements, Dell Corp. discovered computational errors in its 2007 and 2006 depreciation expenses. These errors
resulted in the overstatement of each years income by P25,000 net of income taxes. The following amount were reported in the previously issued
financial statements.
2007 2006
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000
Which of the following amounts should be reported as prior period adjustments and net income in Dell Corp.s 2008 and 2007 comparative financial
statements?
Year Prior period Adj. Net Income
a. 2007 - 150,000
2008 ( 50,000) 180,000
b. 2007 ( 50,000) 150,000
2008 - 180,000
c. 2007 ( 25,000) 125,000
2008 - 180,000
d. 2007 - 125,000
2008 - 180,000
2. Henri Company purchased for cash on January 01, 2003, three machines which cost a total of P1,800,000.
Estimated selling prices of the machines were:
Machine 1 P 600,000
Machine 2 750,000
Machine 3 900,000
The machines were believed to have a useful life of 10 years without residual value. The company records depreciation annually on a monthly basis. On
January 01, 2006, Machine 1 was sold for P375,000 cash. The proceeds were credited to the Machinery account.
On July 01, 2007, Machine 3 was traded in for a new machine (No. 4) which had a cash price of P750,000, Henri paying P300,000 for the difference with the
trade in value of the old machine.
What should be the balance of the Accumulated depreciation Machinery on December 31, 2007 after adjustment of the books?
a.P805,500 b.P481,500 c.P337,500 d.P387,500
3.The following data are taken from the shareholders equity section of the balance sheet of FLOOD CORP.
12.31.6 12.41.07
Ordinary shares (P100 par value) 625,000 637,500
Share premium in excess of par 312,500 362,500
Retained earnings 625,000 653,750
During 2007, the company declared and paid cash dividend of P93,750 and also declared and issued a stock dividend. There were no other changes in stock
issued and outstanding during 2007.
Net income for 2006 is:
a. P 28,750 b. P 122,500 c. P 135,000 d. P 185,000
4. During 2007, Pen Corporation acquired common stock of Rap Company as follows:
LOT DATE NO. OF SHARES COST PER SHARE TOTAL COST
A January 25 800 560 448,000
B April 5 600 600 360,000
Rap Company issued a 20% stock dividend on February 14, 2007. Common stock rights were issued on October 30, 2007 entitling holders to purchase
one new common share at P450 for each ten shares held. On this date, the rights were being traded at P20 each and the stock ex-rights were being
traded at P620 per share.
On November 8, 2007, Pen sold 500 rights that pertained to Lot A. Sales price was P25 per right. The corporation paid a brokerage fee of P500 on the
sale of the stock rights. Pen exercised the remaining rights on November 11, 2007.
6. On July 1, 2007, Marcus Company purchased 4,000 of the P1,000 face amount , 8% bonds of Olay Corporation for P3,692,000 to yield 10% per annum.
The bonds which mature on July 1, 2010, pay interest semiannually on January 1 and July 1. Marcus Company classifies the securities as held to
maturity.
7. Use the same information in number 6 above. How much is the interest revenue reported by Marcus Companys income statement for year ended
December 31, 2007?
a.P200,000 b.P190,800 c.P184,600 d.P160,000
An insurance premium of P7,200 was prepaid in 2007 covering the years 2007, 2008, and 2009. The prepayment was recorded with a debit to insurance
expense. In addition, on December 31, 2008, fully depreciated machinery was sold for P3,800 cash, but the sale was not recorded until 2009. There were no
other errors during 2007 or 2008 and no corrections have been made for any of the errors. Ignore income tax considerations.
8. What is the total net effect of the errors on the amount of Cline's working capital at December 31, 2008?
a.Working capital overstated by P2,000. b.Working capital overstated by P600.
c.Working capital understated by P1,800. d.Working capital understated by P4,800.
9. What is the total effect of the errors on the balance of Cline's retained earnings at December 31, 2008?
a.Retained earnings understated by P4,000. b.Retained earnings understated by P1,800.
c.Retained earnings understated by P1,000. d.Retained earnings overstated by P1,400.
10. In your examination of the books and accounts of PLUM Company for the year 2008, you have noted that the entire past due accounts of the company
amounting to P200,000 should be set up as Allowance for Doubtful accounts. On these past due accounts, management with proper recommendation
from the companys legal counsel, has decided to write off accounts with balance totaling P40,000. As of December 31, 2008, the balance of
Allowance for Doubtful Accounts was P125,000.
The additional provision required for the companys doubtful accounts is:
a.P 35,000 b.P 75,000 c.P160,000 d.P200,000
DIFFICULT
Items 1 and 2 are based on the following:
CONCORD CO. purchased real property for P3,225,000 which included P67,500 for realty tax arrears for prior years. A mortgage of P1,500,000 was assumed
by CONCORD CO. on the purchase. Twenty percent of the purchase price should be allocated to the land and the balance to the building.
In order to make the building suitable for the use of CONCORD CO., remodeling costs had to be incurred in the amount of P337,500. This however
necessitated the demolition of a portion of the building, which resulted in recovery of salvage material sold for P11,250 cash.
Landscaping and parking lot cost the company a total of P120,000 while repairs in the main hall were P16,875.
3. On June 30, 2007, COLT INC. had outstanding 10% P250,000 face amount 15 year bonds maturing on June 30, 2017. Interest is paid on June 30 and
December 31, and bond discount and bond issue costs are amortized on these dates. The unamortized balances on June 30, 2007 of bond discount and
bond issue costs were P13,750 and P5,000 respectively. COLT INC. reacquired all of these bonds at 96 on June 30, 2007 and retired them.
Ignoring income taxes, compute for the gain or loss on bond retirement.
a. Loss of P3,750 b. Loss of P8,750 c. Gain of P1,250 d. Gain of P10,000
b. The cut off bank statement showed a bank charge on January 02, 2009 for P35,250 representing a correction of an erroneous bank credit.
d. On December 31, 2008, the company received and recorded customers postdated
check amounting to P45,000.
6. Compute the adjusted cash to be presented in the balance sheet as at Dec. 31, 2008.
a.P211,914 b.P225,414 c.P238,914 d.P279,414
7. You are reviewing the notes payable and interest expense accounts of Cole Manufacturing Co. as of December 31, 2007 and noted that the company
regularly borrows from the bank in order to finance working capital. The following schedule shows loans with 12% interest rate, with interest payable at
maturity. All loans are repaid at its scheduled maturity date and interest expense is 7recorded when the loans are repaid.
DATE OF LOAN AMOUNT MATURITY DATE TERM OF LOAN
Nov. 01, 2006 P 500,000 Oct. 31, 2007 1 year
Feb. 01, 2007 1,500,000 July 31, 2007 6 months
May 01, 2007 800,000 Jan. 31, 2008 9 months
The client recorded interest expense of P150,000 for 2007. Compute for the correct amount of interest expense that should be reported in the 2007 income
statement.
a. P204,000 b. P212,000 c. P222,000 d. P214,000
10. Voltron Inc. reported inventory of P360,000 at December 31, 2006. The following data were gathered to confirm the reported inventory figure.
Inventory, December 31, 2005 P 320,00
Purchases during 2006 1,410,000
Cash sales during 2006 350,000
Shipment received on December 26, 2006 included
in physical inventory but not recorded as purchases 10,000
Deposit made with suppliers, entered as purchased.
goods were not received during 2006 20,000
Collections on accounts receivable during 2006 1,800,000
Accounts receivable, December 31, 2005 250,000
Accounts receivable, December 31, 2006 300,000
Gross profit percentage on sales 40%
What amount of inventory on consignment and net income related to the sold units respectively should Aguila Company report on December 31, 2006?
a.P225,000 and P36,000 b.P231,000 and P32,000
c.P235,000 and P40,000 d.P375,000 and P44,000
3. Compute for the net profit for 2007 after deducting the presidents bonus and the corporate income tax.
a. P 172,649 b. P 170,886 c. P 170,798 d. P 172,900
4. CATER COMPANY pays its sales representatives fixed monthly salaries and commissions on net sales. Commissions are computed and paid on a
monthly basis (in the month following the month of sales) net of fixed salaries. However, if the fixed monthly salaries exceed their sales commissions earned
for the month, such excess is not charged back to them. Pertinent data for the month of March 2007 are as follows:
SALES REP FIXED SALARY NET SALES COMMISSION RATE
A P 25,000 P1,000,000 2%
B 35,000 2,000,000 3%
C 45,000 3,000,000 3%
What amount should CATER COMPANY accrue as sales commission payable in March 2007?
a. P 65,000 b. P 70,000 c. P170,000 d. P175,000
5. On July 1, 2007, Acro Manufacturing Co. issued a five-year note payable with a face amount of P2,500,000 and an interest rate of 10 percent. The
terms of the note require Acro Manufacturing Company to make five annual payments of P500,000 plus accrued interest, with the first payment due June 30,
2008. With respect to the note, the current liabilities section of Acros December 31, 2007, balance sheet should include:
a. P 250,000 b. P 500,000 c. P 625,000 d. P 750,000
1. A CPA firms quality control procedures pertaining to the acceptance of a prospective audit client would most likely include
a. Inquiry of management as to whether disagreements between the predecessor auditor and the prospective client were resolved satisfactorily.
b. Consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion.
c. Inquiry of third parties, such as the prospective clients bankers and attorneys, about information regarding the prospective client and its management.
d. Consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests.
2. An auditor who has been invited to submit a proposal for an audit engagement is a/an
predecessor auditor c. principal auditor
successor auditor d. interim auditor
3. The degree of certainty that the practitioner has attained and wishes to convey is called:
a. audit risk
b. assurance
c. materiality
d. audit report
4. The information below was taken from the bank transfer schedule prepared during the audit of BAY Co.s financial statements for the year ended
December 31, 2011. Assume all checks are dated and issued on December 30, 2011.
Disbursemen Receipt date
t date
Check From To Per Per Per Per
No. Books Bank Books Bank
101 Nation Federal Dec. Jan. 4 Dec. 30 Jan. 3
al 30
202 County State Jan. 3 Jan. 2 Dec. 30 Dec.
31
303 Federa America Dec. Jan. 3 Jan. 2 Jan. 2
l n 31
404 State Republi Jan. 2 Jan. 2 Jan. 2 Dec.
c 31
Which of the above checks might indicate kiting?
#101 and #303.
#202 and #404.
#101 and #404.
#202 and #303.
6. The work-in process inventory of RHODE ISLAND Constructions Co., was completely destroyed by fire on April 1, 2014. You were able to establish the
physical inventory figures as follows:
Sales from January 1 to March 31, were P 300,000. Purchases of raw materials were P 100,000 and freight on purchases, P 10,000. Direct labor during the
period was P 80,000. It was agreed with the insurance adjusters that an average gross profit rate of 32.5% be used and that manufacturing overhead was
45% of direct labor cost.
The value of goods manufactured and completed as of April 1, 2014:
a. P 120,000 b. P c. P d. 182,500
180,000 190,000
7. On December 31, 2009, Alcoa Co. purchased equity securities as trading securities. Pertinent data are as follows:
Fair value
Cost 12/31/11 12/31/10
P Company P 900,000 P 780,000 P 880,000
Q Company 1,100,000 1,240,000 1,120,000
B Company 2,000,000 1,720,000 1,920,000
Total P4,000,00 P3,740,000 P3,920,000
0
On December 31, 2011, Alcoa transferred its investment in security B from trading to available-for-sale because Alcoa intends to retain security B as a long-
term investment.
QUESTION:
What total amount of gain or loss on its securities should be included in Alcoas 2011 profit or loss?
a. P 20,000 gain
b. P 260,000 loss
c. P180,000 loss
d. P180,000 gain
Suggested Solution:
Total fair value, 12/31/11 P3,740,000
Total fair value, 12/31/10 3,920,000
Unrealized loss on trading P 180,000
securities
8. Bridgestone Company bought 20% of Spiratone Corporations ordinary shares on January 1, 2011 for P11,400,000. Carrying amount of Spiratones net
assets at purchase date totaled P50,000,000. Fair value and carrying amounts were the same for all items except for plant and inventory, for which fair
values exceed their carrying amount by P10,000,000 and P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2011. During
2011, Spiratone reported profit of P30,000,000 and paid a P10,000,000 cash dividend.
QUESTIONS:
Based on the above and the result of your audit, answer the following:
What amount should Bridgestone report as net income related to this investment in 2011?
a. P5,200,000
b. P6,200,000
c. P5,400,000
d. P4,200,000
Share of profit (P30,000,000 P6,000,000
20%)
Amortization of excess Inventory ( 400,000)
Amortization of excess Plant ( 400,000)
(P2,000,000/5)
Income from acquisition (see below) 1,000,000
Net investment income P6,200,000
Any excess of the investors share of the net fair value of the associates identifiable assets, liabilities and contingent liabilities over the cost of the
investment is excluded from the carrying amount of the investment and is instead included as income in the determination of the investors share of the
associates profit and loss in the period in which the investment is acquired. (PAS 28 par. 23)
9. On January 1, 2011, Mazda Motor Corporation created a special building fund by depositing a single sum of P200,000 with an independent trustee. The
purpose of the fund is to provide resources to build an addition to the older office building during the latter part of 2015. The company anticipates a total
construction cost of P1,000,000 and completion by January 1, 2016. The company plans to make equal annual deposit from December 31, 2011 through
2015, to accumulate the P1,000,000. The independent trustee will increase the fund each December 31 at an interest rate of 10%. The accounting
periods of the company and the fund end on December 31.
QUESTION:
How much is the annual deposit to the fund? (Round off present value factors to four decimal places)
a. P163,797
b. P100,944
c. P131,038
d. P111,038
Suggested Solution:
Balance 677,900
Divide by future value of ordinary
annuity of P1 to 10% for 5 periods 6.1051
Annual deposit P 111,038
10. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The companys accounting period is the
calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below:
2011 2012
Dividend received on December 31 10,000 12,000
Cash surrender value 84,000 ?
Life insurance expense ? 138,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
The life insurance expense in 2011 is
a. P160,000
b. P122,000
c. P150,000
d. P 66,000
11. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The companys accounting period is the
calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below:
2011 2012
Dividend received on December 31 10,000 12,000
Cash surrender value 84,000 ?
Life insurance expense ? 138,000
12. Morningstar Company took out a P10,000,000 insurance policy on the life of its president on January 2, 2009. The companys accounting period is the
calendar year. The annual premium on the policy is P160,000. Data regarding dividends and cash surrender value are given below:
2011 2012
Dividend received on December 31 10,000 12,000
Cash surrender value 84,000 ?
Life insurance expense ? 138,000
Assuming the president dies on July 1, 2012 and the face of the policy is collected on July 31, 2012, the gain on life insurance settlement is
a. P 9,831,000
b. P 9,825,000
c. P 9,819,000
d. P10,000,000
13. The following items relate to the acquisition of a new machine by Spar Corporation in 2011:
QUESTION:
a. P1,985,000
b. P1,993,000
c. P1,930,000
d. P2,025,000
Suggested Solution:
14. In connection with your audit of the Polycom Corporations financial statements for the year 2011 you noted the following items relative to the companys
intangible assets.
A patent was purchased from Polymer Company for P4,000,000 on January 2, 2010. Polycom estimated that the remaining useful life of the patent to
be 10 years. The patent was carried in Polymers accounting records at a carrying value of P4,000,000 when Polymer sold it to Polycom.
During 2011, a franchise was purchased from Safeland Company for P960,000. In addition, 5% of the revenue from the franchise must be paid to
Safeland. Revenue from the franchise for 2011 was P5,000,000. Polycom estimates the useful life of the franchise to be 10 years and takes full years
amortization in the year of purchase.
Polycom incurred research and development costs of P866,000 in 2011. Polycom estimates that these costs will be recouped by December 31, 2014.
On January 1, 2011, Polycom, because of the recent events in the industry, estimates that the remaining life of the patent purchased on January 2,
2010, is only 5 years from January 1, 2011.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Amortization of patent for 2011
a. P900,000
b. P800,000
c. P720,000
d. P400,000
Cost of patent P4,000,0
00
Less amortization in 2010 400,
(P4,000,000/10) 000
Carrying amount, 1/1/11 P3,600,0
00
Divide by revised remaining useful life
5
Patent amortization for 2011 P
720,0
00
15. On January 2, 2003, Bambino Company spent P480,000 to apply for and obtain a patent on a newly developed product. The patent had an estimated
useful life of 10 years. At the beginning of 2007, the company spent P144,000 in successfully prosecuting an attempted patent infringement. At the
beginning of 2008, the company purchased for P280,000 a patent that was expected to prolong the life of its original patent by 5 years. On July 1,2011, a
competitor obtained rights to a patent that made the companys patent obsolete.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
Carrying amount of patent as of December 31, 2007
a. P360,000
b. P240,000
c. P369,600
d. P355,200
Question No. 1
Cost of patent P480,000
Less amortization up to 12/31/07 (P480,000 240,000
5/10)
Carrying amount of patent, 12/31/07 P240,000
16. Perkins Corporation authorized the sale of P2,000,000 of 12%, 10 year debentures on January 1, 2006. Interest is payable on January 1 and July 1. The
entire issue was sold on April 1, 2006, at 102 plus accrued interest. On April 1, 2011, P1,000,000 of the bond issue was reacquired and retired at 99 plus
accrued interest. On June 30, 2011, the remaining bonds were reacquired at 97 plus accrued interest and refunded with an issue of P1,600,000 of 9%
bonds which were sold at 100.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Use straight line method to amortize premium or discount)
1. Total cash received from the sale of P2 million bonds on April 1, 2006
a. P2,100,000
b. P2,000,000
c. P2,040,000
d. P2,120,000
Question No. 1
Issue price (P2,000,000 1.02) P2,040,000
12% 3/12)
Total cash received from sale of P2,100,000
bonds
17. Intel Inc., leases equipment to its customers under noncancelable leases. On January 1, 2011, Intel leased equipment costing P4,000,000 to Asus Co., for
nine years. The rental cost was P440,000 payable in advance semiannually (January 1 and July 1), plus P20,000 semiannually for executor costs. The
equipment had an estimated life of 15 years and sold for P5,330,250 with an estimated unguaranteed residual value of P800,000. The implicit interest
rate is 12 percent.
QUESTIONS:
Based on the foregoing and the result of your audit, compute for the following: (Round off present value factors to four decimal places).
How much is the total interest income from lease that will be earned by Intel, Inc.?
a. P2,869,988
b. P3,389,748
c. P3,675,616
d. P 0
Suggested Solution:
18. At the beginning of 2011, Golem Company grants 100 share options to each of its 200 employees. Each grant is conditional upon the employees working
for the entity over the next three years. The entity estimates that the fair value of each share option is P45.
On the basis weighted average probability, the entity estimated that 25 percent of employees will leave during the three-year period and therefore forfeit
their rights to the share options.
During 2011, 10 employees leave. The entity revises its estimate of total employee departure over the three-year period from 25 percent to 20 percent.
During 2012, a further 8 employees leave. The entity revises its estimate of total employee departure over the three-year period from 20 percent to 15 per
cent. During 2013, a further 6 employees leave.
Questions:
Based on the above and result of the audit, determine the following:
19. The income statement of BrightStar Corporation for 2011 included the following items:
The following balances have been excerpted from BrightStar Corporations statement of financial position:
12/31/2010 12/31/2011
Accrued interest P 165,000 P 200,200
receivable
Accrued salaries 92,400 195,800
payable
Prepaid insurance 33,000 24,200
QUESTIONS:
Based on the above and the result of your audit, determine the following:
The cash received for interest during 2011 was
a. P1,900,800 c. P2,065,800
b. P2,101,000 d. P2,136,200
Question No. 1
Interest income P2,101,000
Accrued interest receivable, 12/31/10 165,000
Accrued interest receivable, 12/31/11 (200,200)
Cash received for interest during P2,065,800
2011
20. In your audit of Saga Companys statement of comprehensive income for the year ended December 31, 2011, you noted that company reported profit of
P10,000,000. You raised questions about the following amounts that had been included in profit:
The loss from expropriation was unusual in occurrence in Sagas line of business.
QUESTIONS:
Saga Companys 2011 statement of comprehensive income should report profit at
a. P9,000,000
b. P6,500,000
c. P7,000,000
d. P8,500,000
Question No. 1
Reported profit P10,000,000
Unrealized loss on decline in value of
available for 500,000
sale securities
Adjustment of profit of prior year net-debit 2,000,000
Exchange differences gain on translating
foreign (4,500,000)
operation
Realized revaluation surplus (1,000,000)
Adjusted profit P7,000,000
58 | P a g e
PROBLEM 1
Shown below is the bank reconciliation for Orchid Company for
November 2013:
Balance per bank, Nov. 30, 2013 P 150,000
Add: Deposits in transit 24,000
Total 174,000
Less: Outstanding checks P 28,000
Bank credit recorded in error 10,000 38,000
Cash balance per books, Nov. 30, 2013 P 136,000
The bank statement for December 2013 contains the following
data:
Total deposits P 110,000
Total charges, including NSF check of P 8,000
and a service charge of P 400 96,000
All outstanding checks on November 30, 2013, including the
bank credit, were cleared in the bank in December 2013.
There were outstanding checks of P 30,000 and deposits in
transit of P 38,000 on December 31, 2013.
Based on the above result of your audit, answer the following:
1. How much is the cash balance per bank on December 31,
2013?
a. P 154,000 b. P 150,000 c. P 164,000 d. P 172,400
C
2. How much is the December receipts per books?
a. P 124,000 b. P 96,000 c. P 110,000 d. P 148,000
A
3. How much is the December disbursements per books?
a. P 96,000 b. P 79,600 c. P 89,600 d. P 98,000
B
4. How much is the cash balance per books on December 31,
2013?
a. P 150,000 b. P 170,400 c. P 180,400 d. P 162,000
C
5. In auditing bank reconciliation, which of the following is/are
true?
I. The auditor obtains copies of the entitys reconciliation and
agrees the bank balance to the bank confirmation and the
book balance to the general ledger.
II. The auditor note the date on which outstanding items are
shown on subsequent bank statements and obtain
explanations for all material items cleared within the
reasonable time of the date of receipt of the cash or the
drawing of the checks
A
PROBLEM 2
59 | P a g e
a. P b. P c. P d. P -0-
26,666,667 24,000,000 16,000,000
7. Assuming the fair value of the old building and land on fiscal
year ending June 30, 2015 were P13,000,000 and
P44,000,000, respectively, how much is the net impact on the
comprehensive income of Anabelle Co. on the said fiscal year
under revaluation model?
a. P b. P c. P 3,000,000 d. P -0-
22,000,000 23,000,000
A
8. Assume Anabelle Co. is a property developer and paid
P2,500,000 to demolish the building on the land, determine
the appropriate amount that the Company should debit to PPE
if its policy is to consider the demolition cost as directly
attributable cost in constructing the new asset.
a. P b. P 2,500,000 c. P d. P -0-
24,000,000 17,500,000
D
PROBLEM 3
On December 31, 2013, Nicole Co. identified that its building
with a carrying amount of P2,400,000 has been impaired. In
estimating the recoverable amount, Nicole has determined
that the fair value of the asset is P2,000,000. In estimating the
value in use, Nicole determined the following:
Year Future cash Future cash
inflows outflows
2014 P 1,200,000 P 400,000
60 | P a g e
C
10. Based on the previous item and information provided
above, how much is the impairment loss?
A
12. Carrying amount of the patent as of December 31, 2014
D
13. Total expenses related to the above intangible assets in
2014
C
14. In evaluating control risk and effectiveness for intangible
assets, controls should be designed for numerous purposes.
Which of the following is not a usual control for intangible
assets?
a. Ensure decisions are appropriately made as to when to
capitalize or expense research and development expenditures.
b. Develop amortization schedules that reflect the remaining
useful life of patents or copyrights associated with the assets.
c. Identify and account for intangible asset impairment.
d. All of the above are usual controls for intangible assets.
D
PROBLEM 5
62 | P a g e
A
16. Net amount recognized in OCI for 2015
PROBLEM 7
A recent fire severely damaged EL COMPANYs administration
building and destroyed many of its financial records. You have
been contracted by ELs management to reconstruct as much
financial information as possible for the month of July. You
learned that EL makes a physical inventory count at the end of
each month to determine monthly ending inventory values.
You also find out that the company applies the average cost
method.
You are able to gather the following information by examining
various documents:
Inventory, July 31 150,000 units
Total cost of goods P 356,400
available for sale in July
Cost of goods sold P 297,000
during July P 303,000
Gross profit on sales for 0.35 per unit
July
Cost of inventory, July1
The following are ELs July purchases of merchandise:
Date Quantity Unit Cost
July 6 180,000 P 0.40
July 12 150,000 0.41
July 16 120,000 0.42
July 17 150,000 0.45
ELs management has asked you to provide the following
information:
18. Number of units on hand, July 1
a. 450,000 b. 848,571 c. 169,714 d. 300,000
D
19. Units sold during July
a. 600,000 b. 300,000 c. 750,000 d. 450,000
C
20. Unit cost of inventory at July
a. P 0.35 b. P 0.396 c. P 0.419 d. P 0.279
B
21. Value of inventory at July 31
a. P 59,400 b. P 52,500 c. P 62,850 d. P 41,850
A
PROBLEM 8
On January 1, 2013, Zest Airways, Inc. issued P 100,000, 10%
10 year bonds when the market rate of interest was 8%.
Interest is payable on June 30 and December 31. The following
financial information is available:
Sales P 300,000
Cost of sales 180,000
Gross profit 120,000
Interest expense ?
Depreciation (14,500)
expense (82,000)
Other expenses ?
64 | P a g e
Net income
a. P0 b. c. (P150,263) d. P347,107
D (P200,000)
PROBLEM 10
On January 1, 2013, Voice Company acquired 100% of the
outstanding shares of Idol Company by issuing 200,000 shares
of its P10 par ordinary with market price of P12 per share. The
book value of Idol Companys net assets was P2,500,000.
Voice Company journalized the said acquisition as follows:
Investment in Subsidiary P2,400,000
Expenses 40,000
Ordinary share capital, P10 par 2,000,000
Share Premium 400,000
Cash 40,000
65 | P a g e
C
29. The correcting entry on the separate books of Voice
Company includes a credit to?
a. Share premium of P15,000
b. Expenses P40,000
c. Investment in Subsidiary of P25,000
d. No entry needed
B
30. What is the best basis for the correcting entry related to
the error above, if any?
PROBLEM 11
On January 1, 2013 investor KITAKITS acquired a 30% interest
in entity BEH! at a cost of P500,000. Investor KITAKITS has
significant influence over entity BEH! and accounts for its
investment in the associate under the equity method. The
associate has net assets of P1,000,000 at the date of
acquisition, which have a fair value of P1,200,000. During the
year ended December 31, 2013 entity BEH! recognized a post-
tax profit of P200,000, and paid a dividend of P18,000. Entity
BEH! also recognized foreign exchange losses of P40,000 in
OCI.
On January 1, 2014, entity BEH! has a rights issue that
investor KITAKITS does not participate in. The rights issue
brings in an additional P150,000 in cash, and dilutes investor
KITAKITS's interest in entity BEH! to 25%.
KITAKITS inquired for the proper accounting treatment of the
dilution from his auditor.
31. Determine the net increase (decrease) on comprehensive
income of the dilution on January 1, 2014.
B
32. The entry on January 1, 2014 will increase (decrease) the
carrying amount of the investment account by
a. (P90,433) b. c. (P37,500) d. P0
(P52,933)
B
33. Impairment losses on equity securities classified at
amortized cost under PFRS 9 are recognized in
C
35. Upon the retirement of the common shares, retained
earnings shall be debited by
D
36. The amount of cash dividends to be distributed to the
common shareholders is
a. 329,800 b. 351,375 c. 355,420 d. 375,000
B
37. The retained earnings appropriated at the end of 2011 is
a. 1.5M b. 2M c. 3.5M d. 6M
B
38. The total stockholders equity at December 31, 2011 is
68 | P a g e
2014:
Operating expenses (including depreciation) incurred for
the year, P21M
Rental income collected for the year, P72M
Each venture receives a share of the income or loss
PROBLEM 15
Kheen Company offers a cash rebate of P1 on each P4 package
of batteries sold during 2013. Historically, 10% of customers
mail in the rebate form. During 2013, 6,000,000 packages of
batteries are sold, and 210,000 P1 rebates are mailed to
customers.
42. What is the rebate expense shown on the 2013 financial
statements?
B
43. What is the rebate liability shown on the 2013 financial
statements?
Page 2 of 5
AP-5901Q
3. Paid-in capital in excess of par value of common stock
a. P8,211,000 b. P11,121,000 c. P10,851,000 d. P10,032,000
4. Retained earnings
a. P1,050,000 b. P1,170,000 c. P1,458,000 d. P930,000
SUGGESTED ANSWERS: C, C, C, D, B
PROBLEM NO. 2
The Perseverance Corporation has requested you to audit
its financial statements for the
year 2005. During your audit, Perseverance presented to you
its balance sheet as of
December 31, 2004 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized
and issued, of which 6,000 are treasury shares
costing P90,000 and shown as an asset P600,000
Common stock, par value P4; 600,000 shares
authorized, of which 450,000 are issued and outstanding
1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 2000) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per
share on August 30, 2005.
Perseverance credited the proceeds to the Preferred Stock
account. The treasury
shares as of December 31, 2004 were acquired in one
purchase in 2004.
2) The preferred stock carries an annual dividend of P1 per
share. The dividend is
cumulative. As of December 31, 2004, unpaid cumulative
dividends amounted to P5
per share. The entire accumulation was liquidated in June,
2005, by issuing to the
preferred stockholders 54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December
1, 2005 to preferred
74 | P a g e
A,B,C
79 | P a g e
PROBLEM NO. 2
The following information relates to Sonic Companys
obligations as of December 31,
2005. For each of the numbered items, determine the amount
if any, that should be
reported as current liability in Sonics December 31, 2005
balance sheet.
1. Accounts payable:
Accounts payable per general ledger control amounted to
P5,440,000, net of P240,000
debit balances in suppliers accounts. The unpaid voucher file
included the following
items that not had been recorded as of December 31, 2005:
a) A Company P224,000 merchandise shipped on December
31, 2005, FOB
destination; received on January 10, 2006.
b) B, Inc. P192,000 merchandise shipped on December 26,
2005, FOB shipping
point; received on January 16, 2006.
c) C Super Services P144,000 janitorial services for the three-
month period ending
January 31, 2006.
d) MERALCO P67,200 electric bill covering the period
December 16, 2005 to
January 15, 2006.
On December 28, 2005, a supplier authorized Sonic to return
goods billed at P160,000
and shipped on December 20, 2005. The goods were returned
by Sonic on December
28, 2005, but the P160,000 credit memo was not received
until January 6, 2006.
a. P5,923,200 b. P5,712,000 c. P5,601,600 d. P5,841,600
2. Payroll:
Items related to Sonics payroll as of December 31, 2005 are:
Accrued salaries and wages P776,000
Payroll deductions for:
Income taxes withheld 56,000
SSS contributions 64,000
Philhealth contributions 16,000
Advances to employees 80,000
a. P776,000 b. P992,000 c. P832,000 d. P912,000
3. Litigation:
In May, 2005, Sonic became involved in a litigation. The suit is
being contested, but
Sonics lawyer believes it is possible that Sonic may be held
liable for damages
estimated in the range between P2,000,000 and P3,000,000,
and no amount is a better
estimate of potential liability than any other amount.
80 | P a g e
5. Note payable:
A note payable to the Bank of the Philippine Islands for
P2,400,000 is outstanding on
December 31, 2005. The note is dated October 1, 2004, bears
interest at 18%, and is
payable in three equal annual installment of P800,000. The
first interest and principal
payment was made on October 1, 2005.
a. P800,000 b. P908,000 c. P72,000 d. P872,000
6. Purchase commitment:
During 2005, Sonic entered in a noncancellable commitment
to purchase 320,000 units
of inventory at fixed price of P5 per unit, delivery to be made
in 2006. On December
31, 2005, the purchase price of this inventory item had fallen
to P4.40 per unit. The
goods covered by the purchase contract were delivered on
January 28, 2006.
a. P0 b. P1,600,000 c. P1,408,000 d. P192,000
7. Deferred taxes:
On December 31, 2005, Sonics deferred income tax account
has a 2005 ending credit
balance of P772,800, consisting of the following items:
Caused by temporary differences in accounting Deferred tax
For gross profit on installment sales P376,000 Cr.
For depreciation on property and equipment 576,000 Cr
For product warranty expense 179,200 Dr
P772,800 Cr.
a. P772,800 b. P952,000 c. P196,800 d. P0
8. Product warranty:
Sonic has a one year product warranty on selected items in its
product line. The
estimated warranty liability on sales made during 2004, which
was outstanding as of
81 | P a g e
9. Premiums:
To increase sales, Sonic Company inaugurated a promotional
campaign on June 30,
2005. Sonic placed a coupon redeemable for a premium in
each package of product
sold. Each premium costs P100. A premium is offered to
customers who send in 5
coupons and a remittance of P30. The distribution cost per
premium is P20. Sonic
estimated that only 60% of the coupons issued will be
redeemed. For the six months
ended December 31, 2005, the following is available:
Packages of product sold 160,000
Premiums purchased 16,000
Coupons redeemed 64,000
a. P1,728,000 b. P1,152,000 c. P1,600,000 d. P576,000
D,D,D,D,D,D
Page 4 of 10
AP-5902
10.Due to Five Six Finance company:
Sonics accounting records show that as of December 31,
2005, P1,280,000 was due
to Five Six Finance Company for advances made against
P1,600,000 of trade accounts
receivable assigned to the finance company with recourse.
a. P0 b. P1,600,000 c. P320,000 d. P1,280,000
D
PROBLEM NO. 3
In conjunction with your firms examination of the financial
statements of Pistons
Company as of December 31, 2005, you obtained from the
voucher register the
information shown in the working paper below.
Item
No.
Entry
Date
Voucher
Ref. Description Amount
82 | P a g e
Account
Charged
1 12.18.05 12-202 Supplies, purchased FOB
destination, 12.15.05;
received, 12.17.05 20,000
Supplies on
hand
2 12.18.05 12-204 Auto insurance, 12.15.05 to
12.15.06 24,000
Prepaid
insurance
3 12.21.05 12-206 Repair services; received
12.20.05 24,000
Repairs and
maintenance
4 12.21.05 12-214 Merchandise shipped FOB
shipping point, 11.20.05;
received, 12.4.05 17,000 Inventory
5 12.21.05 12-219 Payroll, 12.6.05 to 12.20.05
(12 working days) 69,000
Salaries and
wages
6 12.26.05 12-221 Subscription to tax reporting
service for 2006 5,000
Dues and
subscription
expense
7 12.28.05 12-230 Utilities for December 2005 29,000 Utilities
expense
8 12.28.05 12-234 Merchandise shipped FOB
destination, 12.24.05;
received, 1.2.06 111,500 Inventory
9 12.28.05 12-243 Merchandise shipped FOB
destination, 12.26.05;
received, 12.29.05 84,000 Inventory
10 01.02.06 01-001 Legal services, received
12.28.05 46,000
Legal and
professional
expense
11 01.02.06 01-002 Medical services for
employees for December
2005 25,000 Medical expense
12 01.05.06 01-003 Merchandise shipped FOB
shipping point, 12.29.05;
received, 1.4.06 55,000 Inventory
13 01.10.06 01-004 Payroll, 12.21.05 to 01.05.06
(12 working days in total,
4 working days in Jan.) 72,000
Salaries and
wages
83 | P a g e
PROBLEM NO. 4
During your regular annual audit of Rockets Company for the
year ended December 31,
84 | P a g e
Requirement no. 1
1) Discount on bonds payable (P10,000,000 - P9,500,000)
500,000
Bonds payable 500,000
To correct the original entry on issuance of 10,000 bonds
Retained earnings (P500,000 x 14/102) 68,627
85 | P a g e
Requirement no. 2
a) Bonds payable (P10,000,000 + P2,000,000) 12,000,000
b) Bond discount (P500,000 x 76/102) 372,549
c) Bond premium (P100,000 x 76/82) 92,683
d) Accrued interest (P12,000,000 x 12% x 2/12) 240,000
e) Interest expense
P10,000,000 x 12% 1,200,000
P2,000,000 x 12% x 6/12 120,000
Bond discount amortization (P500,000 x 12/102) 58,824
Bond premium amortization (P100,000 x 6/82) (7,317)
1,371,506
PROBLEM NO. 5
Wizards Company presented to you their records in
connection with the audit of the
companys financial statements for the year ended December
31, 2005. This is the first
time the company has been audited. The company floated a
serial bond issue in 2003.
Your audit showed the following details of the issue and the
accounts as of December 31,
2005:
Total amount P5,000,000
Date of issue October 2, 2003
Proceeds from issue P4,900,000
Interest rate 5% per annum
Interest payment date October 1
Maturity date P1,000,000 annually, starting October 1, 2005
5% Serial Bonds Payable
10/02/2005 VR P1,000,000 10/02/2003 CR P4,900,000
Accrued Interest Payable
01/02/05 P62,500
REQUIRED:
86 | P a g e
AP-5902
PROBLEM NO. 6
On January 2, 2004, the Suns, Inc. issued P2,000,000 of 8%
convertible bonds at par.
The bonds will mature on January 1, 2008 and interest is
payable annually every January
1. The bond contract entitles the bondholders to receive 6
shares of P100 par value
common stock in exchange for each P1,000 bond. On the date
of issue, the prevailing
market interest rate for similar debt without the conversion
option is 10%.
On December 31, 2005, the holders of the bonds with total
face value of P1,000,000
exercised their conversion privilege. In addition, the company
reacquired at 110, bonds
with a face value of P500,000.
The balances in the capital accounts as of December 31, 2004
were:
Common stock, P100 par, authorized 50,000 shares, issued
and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000
Market value of the common stock and bonds were as follows:
Date Bonds Common stock
December 31, 2004 118 40
December 31, 2005 110 42
QUESTIONS:
Based on the above and the result of your audit, answer the
following:
1. How much of the proceeds from the issuance of convertible
bonds should be allocated
to equity?
a. P634,000 b. P126,816 c. P221,664 d. P0
B
2. How much is the carrying value of the bonds payable as of
December 31, 2004?
a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502
D
3. How much is the interest expense for the year 2005?
a. P160,000 b. P138,940 c. P179,617 d. P190,050
D
88 | P a g e
B
4. Which of the following procedures is least likely to be
performed before the balance sheet
date?
a. Observation of inventory c. Search for
unrecorded liabilities
90 | P a g e
D
6. When using confirmation to provide evidence about
completeness assertion for accounts
payable, the appropriate population most likely is
a. Vendors with whom the entity has previously done business.
b. Amounts recorded in the accounts payable subsidiary
ledger.
c. Payees of checks drawn in the month after the year end.
d. Invoices filed in the entitys open invoice file.
A
7. Which of the following is a substantive test that an auditor is
most likely to perform to
verify the existence and valuation of recorded accounts
payable?
a. Investigating the open purchase order file to ascertain that
pre-numbered purchase
orders are used and accounted for.
b. Receiving the clients mail, unopened, for a reasonable
period of time after year end
to search for unrecorded vendors invoices.
91 | P a g e
AP-5902
12. Which of the following audit procedures is best for
identifying unrecorded trade accounts
payable?
a. Reviewing cash disbursements recorded subsequent to the
balance sheet date to
determine whether the related payables apply to the prior
period.
b. Investigating payables recorded just prior to and just
subsequent to the balance
sheet date to determine whether they are supported by
receiving reports.
c. Examining unusual relationships between monthly accounts
payable balances and
recorded cash payments.
d. Reconciling vendors statement to the file of receiving
reports to identify items
received just prior to the balance sheet date.
A
13. In verifying debits to perpetual inventory records of a
nonmanufacturing firm, the auditor
is most interested in examining the purchase
a. Journal b. Requisitions c. Orders d. Invoices
D
14. Which of the following procedures relating to the
examination of accounts payable could
the auditor delegate entirely to the clients employees?
a. Test footings in the accounts payable ledger
b. Reconcile unpaid invoices to vendors statements
c. Prepare a schedule of accounts payable
d. Mail confirmations for selected account balances
C
15. 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. Existence or occurrence c. Completeness
b. Presentation and disclosure d. Valuation or allocation.
B
16. An auditors program to audit long term debt should
include steps that require
a. Examining bond trust indentures
b. Inspecting the accounts payable subsidiary ledger.
c. Investigating credits to the bond interest income account.
d. Verifying the existence of the bondholders.
A
17. In an audit of bonds payable, an auditor expects the trust
indenture to include the
a. Auditees debt-to-equity ratio at the time of issuance.
b. Effective yield of the bonds issued.
93 | P a g e
c. Subscription list.
d. Description of the collateral
D
18. In auditing long-term bonds payable, an auditor most likely
will
a. Perform analytical procedures on the bond premium and
discount accounts.
b. Examine documentation of assets purchased with bond
proceeds or liens
c. Compare interest with the bond payable amount for
reasonableness.
d. Confirm the existence of individual bondholders at year-end.
C
19. The audit procedures used to verify accrued liabilities differ
from those employed for the
verification of accounts payable because
a. Accrued liabilities usually pertain to services of a continuing
nature while accounts
payable are the result of completed transactions
b. Accrued liability balances are less material than accounts
payable balances.
c. Evidence supporting accrued liabilities in nonexistence while
evidence supporting
accounts payable is readily available.
d. Accrued liabilities at year-end will become accounts payable
during the following
year.
A
20. The auditor is most likely to verify accrued commissions
payable in conjunction with the
a. Sales cutoff test
b. Verification of contingent liabilities
c. Review of post balance sheet date disbursements
d. Examination of trade accounts payable
A
End of AP-5902
Page 1 of 4
AP-5902Q
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING PROBLEMS
AUDIT OF LIABILITIES QUIZZERS
PROBLEM NO. 1
Cavaliers Corporation is selling audio and video appliances.
The companys fiscal year
ends on March 31. The following information relates to the
obligations of the company as
of March 31, 2005:
Notes payable
94 | P a g e
Based on the above and the result of your audit, determine the
amounts that will be shown
on the 2005 financial statements for the following:
1. Warranty expense
a. P108,000 b. P164,000 c. P144,000 d. P80,000
A
2. Estimated liability from warranties
a. P108,000 b. P136,000 c. P164,000 d. P80,000
D
3. Premium expense
a. P 75,600 b. P108,000 c. P183,600 d. P126,000
A
4. Inventory of AM/FM radio
a. P46,950 b. P77,350 c. P39,950 d. P56,950
D
5. Estimated liability for premiums
a. P75,600 b. P63,450 c. P36,400 d. P44,800
C
SUGGESTED ANSWERS: A, D, A, D, C
Page 3 of 4
AP-5902Q
PROBLEM NO. 3
In the audit process, the following data were obtained from the
books of the Spurs
Company which uses a voucher system. All invoices are
subject to term 2/10, n/30 and
are entered net with the discount entered in the Purchase
Discount column of the voucher
register. The accountant in charge of the books went on leave
to attend to his family
based in New Jersey. A fresh accounting graduate has been
assigned to record the
transactions. At year-end, the substitute accountant finds that
the unpaid vouchers do not
agree with the Vouchers Payable control account. You are
called to adjust the matter.
A schedule of unpaid vouchers as of December 31, 2005, all of
which are net of discount,
is presented to you:
Date Voucher No. Supplier Amount
Nov. 27 797 Duncan Supply Co. P 78,400
Dec. 02 821 Ginobili Distributors 19,600
11 829 Parker Sales 44,100
20 836 Mohamed Dealers 17,150
21 842 Bowen Merchandising 22,050
22 856 Horry Mercantile 80,850
31 865 Jackson Traders 78,400
P340,550
Vouchers Payable (control account)
Cash disbursements P1,309,500 Purchases journal P1,645,000
Purchase returns journal 36,750*
97 | P a g e
AP-5903
CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
AUDITING PROBLEMS
AUDIT OF PROPERTY, PLANT & EQUIPMENT AND
INTANGIBLE ASSETS
PROBLEM NO. 1
The property, plant and equipment section of White
Corporations balance sheet at
December 31, 2004 included the following items:
Land P 2,500,000
Land improvements 560,000
Building 3,600,000
Machinery and equipment 6,600,000
During 2005 the following data were available to you upon
your analysis of the accounts:
Cash paid on purchase of land P10,000,000
Mortgage assumed on the land bought, including interest at
16% 16,000,000
Realtors commission 1,200,000
Legal fees, realty taxes and documentation expenses 200,000
Amount paid to relocate persons squatting on the property
400,000
Cost of tearing down an old building on the land 300,000
Amount recovered from the salvage of the building demolished
600,000
Cost of fencing the property 440,000
Amount paid to a contractor for the building erected 8,000,000
Building permit fees 50,000
Excavation expenses 250,000
Architects fee 100,000
Interest that would have been earned had the money used
during
the period of construction been invested in the money market
600,000
Invoice cost of machinery acquired 8,000,000
Freight, unloading, and delivery charges 240,000
Customs duties and other charges 560,000
Allowances, hotel accommodations, etc., paid to foreign
technicians during instillation and test run of machines
1,600,000
Royalty payment on machines purchased (based on units
produced and sold) 480,000
REQUIRED:
Based on the above and the result of your audit, compute for
the following as of December
31, 2005:
1. Land
2. Land improvements
3. Building
4. Machinery and equipment
99 | P a g e
PROBLEM NO. 8
On December 31, 2004, Silver Corporation acquired the
following three intangible assets:
A trademark for P300,000. The trademark has 7 years
remaining legal life. It is
anticipated that the trademark will be renewed in the future,
indefinitely, without
problem.
Goodwill for P1,500,000. The goodwill is associated with
Silvers Hayo Manufacturing
reporting unit.
A customer list for P220,000. By contract, Silver has
exclusive use of the list for 5
years. Because of market conditions, it is expected that the list
will have economic
value for just 3 years.
On December 31, 2005, before any adjusting entries for the
year were made, the following
information was assembled about each of the intangible
assets:
a) Because of a decline in the economy, the trademark is now
expected to generate cash
flows of just P10,000 per year. The useful life of trademark still
extends beyond the
foreseeable horizon.
b) The cash flows expected to be generated by the Hayo
Manufacturing reporting unit is
P250,000 per year for the next 22 years. Book values and fair
values of the assets and
liabilities of the Hayo Manufacturing reporting unit are as
follows:
Book values Fair values
Identifiable assets P2,700,000 P3,000,000
Goodwill 1,500,000 ?
Liabilities 1,800,000 1,800,000
c) The cash flows expected to be generated by the customer
list are P120,000 in 2006
and P80,000 in 2007.
Page 8 of 10
AP-5903
REQUIRED:
Based on the above and the result of your audit, determine the
following: (Assume that the
appropriate discount rate for all items is 6%):
1. Total amortization for the year 2005
a. P73,333 b. P141,515 c. P116,190 d. P86,857
2. Impairment loss for the year 2005
a. P90,476 b. P133,333 c. P179,584 d. P0
3. Carrying value of Trademark as of December 31, 2005
a. P300,000 b. P257,143 c. P166,667 d. P120,416
4. Carrying value of Goodwill as of December 31, 2005
108 | P a g e
A,B,C,A,B
PROBLEM NO. 9
Select the best answer for each of the following:
1. Property, plant and equipment is typically judged to be one
of the accounts least
susceptible to fraud because
a. The amounts recorded on the balance sheet for most
companies are immaterial.
b. The inherent risk is usually low.
c. The depreciated values are always smaller than cost.
d. Internal control is inherently effective regarding this
account.
2. Which is the best audit procedure to obtain evidence to
support the legal ownership
of real property?
a. Examination of corporate minutes and board resolutions
with regard to approvals
to acquire real property.
b. Examination of closing documents, deeds and ownership
documents registered
and on file at the register of deeds.
c. Discussion with corporate legal counsel concerning the
acquisition of a specific
piece of property.
d. Confirmation with the title company that handled the
escrow account and
disbursement of proceeds for the closing of the property.
3. When few property and equipment transactions occur
during the year the continuing
auditor usually obtains and understanding of internal control
and performs
a. Tests of controls
b. Analytical procedures to verify current year additions to
property and equipment
c. A thorough examination of the balances at the beginning of
the year.
d. Extensive tests of current year property and equipment
transactions.
4. Which of the following combinations of procedures is an
auditor most likely to perform
to obtain evidence about fixed asset addition?
a. Inspecting documents and physically examining assets.
b. Recomputing calculations and obtaining written
management representations.
c. Observing operating activities and comparing balances to
prior period balances.
109 | P a g e
B,B,D,A
Page 9 of 10
AP-5903
5. If an auditor tours a production facility, which of the
misstatements or questionable
practices is most likely to be detected by the audit procedures
specified?
a. Depreciation expense on fully depreciated machinery has
been recognized.
b. Overhead has been overapplied.
c. Necessary facility maintenance has not been performed.
d. Insurance coverage on the facility has lapsed.
6. In testing for unrecorded retirements of equipment, an
auditor is most likely to
a. Select items of equipment from the accounting records and
then locate them
during the plant tour.
b. Compare depreciation journal entries with similar prior-year
entries in search of
fully depreciated equipment.
c. Inspect items of equipment observed during the plant tour
and then trace them to
the equipment subsidiary ledger.
d. Scan the general journal for unusual equipment additions
and excessive debits to
repairs and maintenance expense.
7. Determining that proper amounts of depreciation are
expensed provides assurance
about managements assertions of valuation and
a. Presentation and disclosure. c. Rights and obligations.
b. Completeness. d. Existence or occurrence.
8. The auditor may conclude that depreciation charges are
insufficient by noting
a. Insured values greatly in excess of book values.
b. Large numbers of fully depreciated assets.
c. Continuous trade-in of relatively new assets.
d. Excessive recurring losses on assets retired.
9. An auditor analyzes repairs and maintenance accounts
primarily to obtain evidence in
support of the audit assertion that all
a. Noncapitalizable expenditures for repairs and maintenance
have been recorded in
the proper period.
b. Expenditures for property and equipment have been
recorded in the proper
period.
110 | P a g e
A,A,D,A
End of AP-5903