Punongbayan & Araullo’s 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

2. Henry Company had the following bank reconciliation at March 31:

Balance per bank statement, March 31 P 93,000
Add deposit in transit 20,600
P 113,600
Less outstanding checks 25,200
Balance per books, March 31 P 88,400

Data per bank statement for the month of April follow:

Deposits P 116,800
Disbursements P 99,400

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

The outstanding accounts receivable as of June 30, 2008 were:

a.P110,000 b.P106,875 c.P106,560 d.P285,000

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 LEISA’s 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:

Total income since incorporation P 7,875,000

Total cash dividends paid 2,437,500
Proceeds from sale of donated stock 843,750
Total value of stock dividends distributed 562,500
Excess of proceeds over cost of treasury stock sold 131,250
What should be the balance of the Retained earnings account as of December 31, 2007?
a.P 4,875,000 b. P 6,218,750 c. P 7,031,250 d. P 10,031,250

10. Still Trading made investments in available for sale securities. The Unrealized gain or loss account has a
debit balance of P38,700 at December 31, 2006. An analysis of the investment account on December 31,
2006 showed the following:
No. of shares Cost Market
A common 600 shares P922,500 P810,000
B common 225 shares 229,500 270,000
C common 2,000 shares 808,500 841,800
On July 01, 2007, the shares of B common were sold for P210,000. On December 31, 2007, A shares were
quoted at P1,320 per share and C common shares were quoted at P414 per share.
How much is the required increase in the Unrealized gain or loss account at the end of 2007?
a.P130,500 b.P111,000 c.P 91,800 d.P 31,800

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 year’s 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

Dell Corp. net income is correctly reported at P180,000.

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.

The gain on the sale of right is:

a.P5,208 b.P4,708 c.P3,750 d.P3,250

5. Use the same information used in Number 4. How many new shares of RPP common were acquired by
Peninsula through the exercise of the stock rights?
a.168 shares b.140 shares c.118 shares d.106 shares

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.

What is the investment carrying value at December 31, 2007?

a.P3,975,400 b.P3,741,200 c.P3,716,600 d.P3,667,400

7. Use the same information in number 6 above. How much is the interest revenue reported by Marcus
Company’s income statement for year ended December 31, 2007?
a.P200,000 b.P190,800 c.P184,600 d.P160,000

Use the following information for questions 8 and 9.

Cline Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2007 Dec. 31, 2008_________
Ending inventory P3,000 understated P4,400 overstated
Depreciation expense P 800 understated

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
company’s 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 company’s 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.

1. The cost of the land was:

a.P631,500 b.P645,000 c.P765,000 d.P945,000
2. The cost of the building was:
a.P2,467,500 b.P2,923,125 c.P2,906,250 d.P4,123,125

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

Items 4 to 6 are based on the following:

You are conducting an audit of the MART CORPORATION for the year ended December 31, 2008. The
internal control procedures surrounding cash transactions were not adequate. Jane Quipit, the bookkeeper-
cashier handles cash receipts, maintains accounting records and prepares the monthly reconciliations of
the bank account. She prepared the following reconciliation at the end of the year:
Balance per bank statement P 315,000
Add : Deposit in transit P 157,725
Note collected by bank 13,500 171,225
Balance P 486,225
Less : Outstanding checks 222,075
Balance per general ledger P 264,150
In the process of your audit, you gathered the following:
a. At December 31, 2008, the bank statement and the general ledger showed balances of P315,000
and P264,150 respectively.

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.

c. Included in the list of outstanding checks were the following:

1. A check payable to a supplier, dated December 29, 2008, in the amount of P13,275,
released on January 05, 2009.
2. A check representing advance payment to a supplier in the amount of P33,489, the
date of which is January 04, 2009, and released in December 2008.

d. On December 31, 2008, the company received and recorded customer’s postdated
check amounting to P45,000.

4. Compute the adjusted deposit in transit as of December 31, 2008.

a.P157,725 b.P112,725 c.P202,725 d.P112,500

5. Compute the adjusted outstanding checks as of December 31, 2008.

a.P222,075 b.P235,350 c.P255,564 d.P175,311

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

Use the following information for questions 8 to 9.

The balance sheet for the Dixie Corporation on December 31, 2007 includes the following
receivables balances:

Notes Receivable P365,000

Less notes discounted 155,000 P210,000
Accounts Receivable P856,000
Less allowance for doubtful accounts 41,500 814,500

Selected ransactions during 2008 included the following:

a. Notes received in settlement of accounts totaled P825,000.
b. Notes receivable discounted as of December 31, 2007, were paid at maturity with the exception of one
P30,000 note on which the company had to pay the bank P30,900, which included interest and protest
fees. It is expected that recovery will be made on this note early 2009.
c. Customers’ notes of P600,000 were discounted with recourse during the year, proceeds from their
transfer being P585,000. Of this total, P480,000 matured during the year without notice of protest.
h. Notes receivable collected during the year totaled P270,000 and interest collected was P24,500.

Determine the adjusted balances of the following accounts as of December 31, 2008:
8. Notes Receivable (including notes receivable discounted).
a. P320,000 b. P365,000 c. P165,000 d. P285,000
9. Notes Receivable Discounted
a. P155,000 b. P600,000 c. P120,000 d. P105,000

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 is the estimated inventory shortage at December 31, 2006?

a.P60,000 b.P50,000 c.P40,000 d.P 5,000

CLINCHER
1. On October 01, 2006, Aguila Company consigned 50 computers at a unit cost of P15,000 to HP Company
for sale at P20,000 each and paid P20,000 transportation cost. On December 31, 2006, HP Company reported the
sales of 25 computers and returned 10 units. Cost paid by the consignee on the returned units was P4,000.
Amount due to consignor was remitted on the same date. Commission rate as agreed upon was 15%.

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

Items 2 and 3 are based on the following information:

Some of the information you gathered in the audit of the financial statement of CYNDY CORP. are:
1. The president is to receive a bonus consisting of a basic amount equivalent to 5% of the
company’s net income before deduction of bonus but after deduction of corporate income tax.
2. In addition, the basic bonus will be increased by the company’s tax savings because the total
amount of bonus is deductible in computing the company’s taxable income. The tax savings is
the difference between the income tax the company would have paid if there were no bonus and
the taxes the company must pay after deducting the bonus.
3. CYNDY CORPORATION reported a net income of P280,000 in 2007 before deduction of the
president’s bonus and the corporate income tax.
4. The company is subject to a corporate income tax of 35% of its net income after deducting the
president’s bonus.
2. Compute for the total amount of bonus the president should receive in 2007:
a. P 9,100 b. P 9,352 c. P14,387 d. P14,136

3. Compute for the net profit for 2007 after deducting the president’s 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 Acro’s December 31, 2007, balance sheet should include:
a. P 250,000 b. P 500,000 c. P 625,000 d. P 750,000