FQ1.

1 - Audit of Financing Cycle

The shareholder’s equity of the OMAN COMPANY as of December 31, 2015, was as follows:
Ordinary shares, P10 par, authorized 300,000 shares; 250,000 shares P 2,500,000
issued and outstanding
Share premium – issuance 3,500,000
Retained Earnings 1,740,000

On June 1, 2016, Oman reacquired 40,000 ordinary shares at P40. The following transactions occurred in
2016 with regard to these shares.
July 1 Sold 15,000 shares at P48
Aug. 1 Sold 19,000 shares at P27
Sept. 1 Retired 1,000 shares

The following entries were made by the company’s accountant to record the preceding transactions.
2016
June 1 Treasury shares 1,600,000
Cash 1,600,000
July 1 Cash 720,000
Treasury shares 720,000
Aug. 1 Cash 513,000
Treasury shares 513,000
Sept. 1 Ordinary shares 10,000
Treasury shares 10,000

Oman’s net income for 2016 was P135,000.

Based on the preceding information, determine the correct balance of the following accounts:
1. Treasury shares
2. Ordinary shares
3. Share premium – issuance
4. Share premium – treasury shares
5. Retained earnings (before appropriation for treasury shares)
FQ1.1 - Audit of Financing Cycle
CHING CHING has been employed as an accountant by IRAN, INC. for a number of years. She handles all
accounting duties, including the preparation of financial statements. The following is a statement of earned
surplus prepared by Ching Ching for 2016:

Iran, Inc.
Statement of Earned Surplus for 2016
Balance at January 1, 2016 P 365,
000
Additions:
Change in estimate of 2015 amortization P 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Net income for 2016 150,000
Decreased depreciation due to change in estimated 13,000 173,000
life
538,000
Deductions:
Dividends declared and paid 100,000
Loss on sale of equipment 2,500
Loss on earthquake 83,000 185,000
Balance at December 31, 2016 P 352,500

1. What is the correct net income of Iran for 2016?

2. What is the correct retained earnings as of December 31, 2016?

FQ3.1 – Audit of Cash

The books of Manila's Service, Inc. disclosed a cash balance of P687,570 on December 31, 2006. The bank
statement as of December 31 showed a balance of P547,800. Additional information that might be useful in
reconciling the two balances follows:
(a) Check number 748 for P30,000 was originally recorded on the books as P45,000.
(b) A customer's note dated September 25 was discounted on October 12. The note was dishonored on
December 29 (maturity date). The bank charged Manila's account for P142,650, including a protest fee
of P2,650.
(c) The deposit of December 24 was recorded on the books as P28,950, but it was actually a deposit of
P27,000.
(d) Outstanding checks totaled P98,850 as of December 31.
(e) There were bank service charges for December of P2,100 not yet recorded on the books.
(f) Manila's account had been charged on December 26 for a customer's NSF check for P12,960.
(g) Manila properly deposited P6,000 on December 3 that was not recorded by the bank.
(h) Receipts of December 31 for P134,250 were recorded by the bank on January 2.
(i) A bank memo stated that a customer's note for P45,000 and interest of P1,650 had been collected on
December 27, and the bank charged a P360 collection fee.
Based on the above and the result of your audit, determine the following:
1. Adjusted cash in bank balance
2. Net adjustment to cash as of December 31, 2006
FQ2.1 - Audit of Investing Cycle

The property, plant and equipment section of Warfield Corporation’s balance sheet at
December 31, 2005 included the following items:
Land P 600,000
Land improvements 280,000
Buildings 2,200,000

The following transactions occurred during 2006:

a) A tract of land was acquired for P300,000. As of December 31, the company has not
determined its future use.
b) A plant facility consisting of land and building was acquired from Heneral Company in
exchange for 40,000 shares of Warfield’s common stock. On the date of acquisition, Warfield’s
stock had a closing market price of P37 per share on the Philippine Stock Exchange. The plant
facility was carried on Heneral’s books at P220,000 for land and P640,000 for the building on
the date of exchange. Current appraised values for land and building, respectively, are
P460,000 and P1,380,000.
c) On May 1, 2006, items of machinery and equipment were purchased at a total cost of
P896,000, inclusive of 12% VAT. Additional costs of P26,000 for freight and P52,000 for
installation were incurred.
d) Expenditures totaling P190,000 were made for new parking lots, streets and sidewalks at the
corporation’s various plant locations. These expenditures had an estimated life of 15 years.

Based on the above and the result of your audit, determine the following:
1. Adjusted balance of Land as of December 31, 2006
2. Adjusted balance of Buildings as of December 31, 2006
FQ2.1 - Audit of Investing Cycle
The Marilao Company has the following transactions in the stocks of the Sta. Maria Corp.
a) On January 2, 1999, Marilao purchased 4,000 shares of P100 par value common stock at P110 per
share.
b) The Sta. Maria Corp. was expanding and on March 2, 2000, it issued stock rights to its stockholders. The
holder needs four rights to purchase one share of common stock at par. The market value of the stock on
that date was P140 per share. There was no quoted price for the rights. No journal entry was made to
record the receipt of the rights.
c) On April 2, 2000, Marilao exercised all its stock rights. The Investment in Stock account was charged for
the amount paid.
d) Robinson, Marilao’s accountant, felt that the cash paid for the new shares was merely an assessment
since Marilao’s proportionate share in Sta. Maria was not changed. Hence, he credited all dividends (5%
in December of each year) to the Investment in Stock account until the debit was fully offset.
e) Marilao received a 50% stock dividend from Sta. Maria in December 2004. Because the shares received
were expected to be sold, the company’s president instructed Robinson not to make any entry for this
dividend. The company did sell the dividend shares in January 2005 for P150 per share. The proceeds
from the sale were credited to income.
f) In December 2005, Sta. Maria’ stocks were split on a two-for-one basis and the new shares were issued
as no par shares. Marilao found that each new share was worth P10 more than the P110 per share
original acquisition cost. For this reason, Marilao decided to debit the Investment in Stock account with
the additional shares received at P110 per share and credited revenue for it.
g) In August 2006, Marilao sold one half (½) of its holdings in Sta. Maria at P120 per share. The proceeds
were credited to the Investment in Stock account.

Marilao uses the average method in recording the sale of its investment in stock.

Based on the above and the result of your audit, determine the following:
1. Cost of investment to be allocated to stock rights received on March 2, 2000
2. Unadjusted balance of Investment in Sta. Maria stock on December 31, 2006
3. Adjusted balance of Investment in Sta. Maria stock on December 31, 2006
4. Gain on the sale of stock dividend received in December 2004
5. Gain on sale of the shares sold in August 2006
FQ2.1 - Audit of Investing Cycle
FQ3.1 – Audit of Cash
You were able to gather the following from the December 31, 2006 trial balance of Mandaluyong Corporation in
connection with your audit of the company:
Cash on hand P 500,000
Petty cash fund 10,000
BPI current account 1,000,000
Security Bank current account No. 01 1,080,000
Security Bank current account No. 02 (80,000)
PNB savings account 1,200,000
PNB time deposit 500,000

Cash on hand includes the following items:

a. Customer’s check for P40,000 returned by bank on December 26, 2006 due to insufficient fund but
subsequently redeposited and cleared by the bank on January 8, 2007.
b. Customer’s check for P20,000 dated January 2, 2007, received on December 29, 2006.
c. Postal money orders received from customers, P30,000.

The petty cash fund consisted of the following items as of December 31, 2006.
Currency and coins P 2,000
Employees’ vales 1,600
Currency in an envelope marked “collections for charity” with names attached 1,200
Unreplenished petty cash vouchers 1,300
Check drawn by Mandaluyong Corporation, payable to the petty cashier 4,000
P10,100

Included among the checks drawn by Mandaluyong Corporation against the BPI current account and recorded
in December 2006 are the following:
a. Check written and dated December 29, 2006 and delivered to payee on January 2, 2007, P80,000.
b. Check written on December 27, 2006, dated January 2, 2007, delivered to payee on December 29,
2006, P40,000.

The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the
deposit balance. These checks were still outstanding at December 31, 2006.
The savings account deposit in PNB has been set aside by the board of directors for acquisition of new
equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date.
Based on the above and the result of your audit, determine the adjusted balances of following:
1. Cash on hand
2. Petty cash fund
3. BPI current account
4. Cash and cash equivalents
FQ4.1 - Comprehensive Cases
Clippers Corporation asked you to review its records and prepare corrected financial statements. The books
of accounts are in agreement with the following balance sheet:

Clippers Corporation
Balance Sheet
December 31, 2006
Assets
Cash P 180,200
Accounts receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P 2,988,600

Liabilities and Owners’ Equity

Miscellaneous liabilities P 14,400
Loan payable 304,800
Accounts payable 301,000
Capital stock 536,000
Paid-in capital 1,832,400
Total liabilities and owners’ equity P 2,988,600

A review of the company’s boos indicates that the following errors and omissions had not been corrected
during the applicable years:

2003 2004 2005 2006

Ending inventory - overstated P - P56,000 P64,000 P -
Ending inventory - understated 48,000 - - 72,000
Prepaid expense 7,200 5,600 4,000 4,800
Unearned income - 3,200 - 2,400
Accrued expense 1,600 600 800 400
Accrued income - 1,000 - 1,200

No dividends were declared during the years 2003 to 2006 and no adjustments were made to retained
earnings. The company’s books reported the following net income:
2003 P60,000 2005 P52,000
2004 44,000 2006 60,000

Based on the above and the result of your audit, determine the adjusted amounts of the following: (Disregard
tax implications)
1. Net income of 2003
2. Net income (loss) in 2004
3. Net income (loss) in 2005
4. Net income (loss) in 2006
5. Retained earnings as of December 31, 2006
FQ4.1 - Comprehensive Cases

The following balance sheet is submitted to you for inspection and review.
Close to You Corporation
Balance Sheet
December 31, 2006
Assets
Cash P 180,200
Accounts receivable 450,000
Inventories 816,000
Prepaid insurance 35,200
Property, plant, and equipment 1,507,200
Total assets P 2,988,600

Liabilities and Owners’ Equity

Miscellaneous liabilities P 14,400
Loan payable 304,800
Accounts payable 301,000
Capital stock 536,000
Paid-in capital 1,832,400
Total liabilities and owners’ equity P 2,988,600

In the course of your audit, you find the following data:

(a) The possibility of uncollectible accounts on accounts receivable has not been considered. It is
estimated that uncollectible accounts will total P19,200.
(b) The amount of P180,000 representing the cost of large-scale newspaper advertising campaign
completed in 2006 has been added to the inventory because it is believe that this campaign will
benefit sales of 2007. It is also found that inventories include merchandise of P65,000 received
on December 31 and has not been recorded as a purchase.
(c) The books show that property, plant and equipment have a cost of P2,227,200 with accumulated
depreciation of P720,000. However, these balances include fully depreciated equipment of
P340,000 that has been scrapped and is no longer on hand.
(d) Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less noncurrent
advances of P23,600 made to company officials.
(e) Loan payable represents a loan from the bank that is payable in regular quarterly installments of
P25,000.
(f) Income tax payable not shown is estimated at P73,000.
(g) Deferred tax liability arising from temporary differences totals P178,200. This liability was not
included in the balance sheet.
(h) Capital stock consists of 25,000 shares of preferred 6% stock, par P20, and 36,000 shares of
common stock, par value P1.
(i) Capital stock have been issued for a total consideration of P1,134,400; the amount received in
excess of the par values of the stock has been reported as paid-in capital.
Net income and dividends were recorded in Paid-In Capital.

Based on the above and the result of the audit, determine the adjusted amounts of the following:

1. Current assets 5. Noncurrent liabilities

2. Noncurrent assets 6. Total liabilities
3. Total assets 7. Contributed Capital
4. Current liabilities 8. Owner’s Equity