RESA

The Review School of Accountancy

AUDITING PROBLEMS 12 FEBRUARY 2011 (Saturday)
First Pre-Board Examinations 3:00 P.M to 5:00 P.M

PROBLEM 1:
The following post-closing trial balance was provided to you by ABC Corp’s accountant, in the course of
your audit of ABC Corp for the year ended December 31, 2011:

ABC Corporation
Post-closing Trial Balance
December 31, 2011
Debit Credited
Cash 2, 250, 000
Investment 5, 800, 000
Receivables 3, 500,500
Inventories 3, 900, 000
Prepayments 1, 700, 000
Building under finance lease, net 2, 765, 055
Equipment, net 5, 500, 000
Furniture and fixture 3, 200, 000
Payables 4, 300, 000
Liability under finance lease 2, 879, 512
Bonds payable, 12 & 5 years 2, 000, 000
Authorized ordinary shares, 100, 000 shares at P100 par 10, 000, 000
10% Authorized preference shares, 100, 000 shares at P50
par 5, 000, 000
Share premium – ordinary 5, 000, 000
Share premium – preference 5, 000, 000
Unissued ordinary shares, 50, 000 shares at par 5, 000, 000
Unissued preference shares, 20, 000 shares at par 1, 000, 000
Issued but reacquired preference shares, 10, 000 at cost 750, 000
Accumulated profits 1, 186, 843
35, 366, 355 35, 366, 355

Audit Notes:

a. Cash account include the following items:

Petty cash fund, P25, 000 in expense vouchers P40, 000
Cash per bank statement, including P50,000 outstanding disbursement
check 2, 050, 800
Employee IOU 160, 000
 b. Investments in equity securities comprise of investment at fair value through profit or loss
acquired during the year at P2.3M but with fair value at year end at P2.5M and investment at
fair value through other comprehensive income acquired during the year at P3.5M but with a
fair value at year end at P3M.

c. The lease agreement for the building was entered into with ZYX Corp. at the beginning of the
current year with the following terms:

 Annual lease payments to be made at the end of each year at P500, 000.
 The ownership of the asset shall be reverted back to the ZYX Corp. after the 10 year lease
term.
 The estimated useful life of the building is 15 years and its fair value at the beginning of the
year was at P3.7M.
 The implicit lease rate known to both parties is 10% while the incremental borrowing rat 8%.

The company accounts for the agreement as a finance lease capitalizing the building and depreciating
the same over 10 years. The periodic payment made at the end of the year was recorded as a debit to
interest expense and liability under finance lease accounts accordingly.

d. The payable account included the following items:

Trade payable P3, 248, 369
Deferred tax liability, net of deferred tax assets P500, 000 900, 000
Premium on bonds payable 151, 631

e. The 5 year bonds payable was issued on January 1, 2010 when the prevailing rate of interest for
similar debt security was 10%. Interests paid at the end of each year were correctly recorded.
The excess of the proceeds from the bonds issuance and its face value was credited to Premium
on bonds payable. Amortization on the Premium is yet to be made to date.
f. Dividend in arrears on preference shares is 3 years.

Required:
1. What is the adjusted balance of cash?
a. 2, 115, 800
b. 2, 065, 800
c. 2, 040, 800
d. 2, 015, 800

2. What is the total current assets after adjustments?

a. 13, 801, 300
b. 13, 876, 300
 c. 13, 616, 300
d. 13, 776, 300

3. What is the total noncurrent assets after adjustments?

a. 12, 700, 000
b. 12, 200, 000
c. 14, 965, 055
d. 15, 219, 537

4. What is the total current liabilities after adjustments?

a. 3, 248, 369
b. 3,198, 369
c. 3, 410, 418
d. 4, 598, 369

5. What is the total non-current liabilities after adjustments?

a. 3, 499, 474
b. 3, 526, 794
c. 4, 667, 463
d. 4, 615, 306

6. What is the total contributed capital?

a. 19, 000, 000
b. 25, 000, 000
c. 18, 250, 000
d. 24, 250, 000

7. What is the effect of the errors on the lease accounting to the current year’s net income?
a. No error committed
b. 192, 772
c. 114, 456
d. 614, 456

8. What is the retroactive adjustments to the retained earnings related to the bonds payable?
a. 52, 158 debit
 b. 24, 887 credit
c. 24, 837 debit
d. 27, 321 credit

9. What is the adjusted accumulated profits-unappropraited?

a. 1, 528, 456
b. 664, 000
c. 778, 456
d. 674, 142

10. What is the total stockholder’s equity?

a. 20, 028, 456
b. 10, 528, 456
c. 19, 778, 457
d. 19, 2278, 457

PROBLEM 2:

You are auditing the financial statements of DEF Corp. for the year ended December 31, 2011. This is the
first time the company’s books shall be audited since its inception of operation in early 2009. The
following were your significant findings:

a. The following accruals were consistently omitted at the end of each year:
2011 2010 2009
Salaries 24, 000 22, 000 20, 000
Utilities 3, 500 3, 200 2, 900
Interest expense 12, 400 13, 400 11, 600
Interest income 25, 000 22, 500 20, 000

b. The company’s December 31 deliveries of merchandise to customers were recorded as sales the
following period. All sales were made under FOB shipping point term. Physical count of goods
were done on December 30 of each year.
2011 2010 2009
Selling price 50, 000 70, 000 65, 000
Cost of merchandise 30, 000 45, 500 45, 500
c. The company also received the following amounts from customers as advance payments for
deliveries made the following year. The company recorded the collections as sales upon receipt
of cash.
2011 2010 2009
Cash advances 20, 000 21,500 19, 400

d. The following items were also not set up by the end of each year?
2011 2010 2009
Unused supplies 3, 500 4, 000 2, 900
Prepaid advertising 2, 100 5,000 6,700

e. You also discovered that the building the company is occupying was a contribution from one of
its stockholder in exchange of 50, 000, P10 par value shares. The appraised value of the building
at that time was P800, 000. The asset was recorded by the company over 20 years under
straight line method and an assumed salvage value of P50, 000.
f. Unaudited records show the following information:
2011 2010 2009
Retained earnings, 642, 900 432, 400 215, 000
end
Net income 310,500 267, 400 215, 000

The only other entry affecting the retained earnings account were the dividend payments made
at the beginning of each year. It is the company’s practice to declare dividends at the end of
each year to be paid at the beginning of the following year. Dividends declared at the end of
2011 to be paid in 2012 was at P150, 000.

Requirements:
11. What is the correct 2009 net income?
a. 195,200
b. 286, 200
c. 240, 700
d. 145, 200

12. What is the correct 2011 net income?

a. 290, 300
b. 275, 300
c. 305, 300
d. 140, 300

13. What is the effect of the errors to the 2011 retained earnings, beginning?
a. 34, 100 over
b. 134, 100 over
c. 54, 300 over
d. 204, 300 over

14. What is the effect of the errors to the 2011 working capital?
 a. 9, 300over
b. 159, 300 over
c. 9, 300 over
d. 109, 300 over

15. What is the correct retained earnings at the end of 2011?

a. 443, 500
b. 483, 600
c. 438, 600
d. 588, 600

PROBLEM 3:
You are auditing for the first time financial statements of GHI Corporation who has been using the cash
basis of accounting. The following schedule was prepared by the company’s accountant:

Schedule of Cash Receipts and Disbursements

For the Year Ended December 31, 2011

Cash Receipts:

From customers 1, 230, 000

From a bank as proceeds of a 12% loan,
January 2 500, 000

From sale of equipment 30, 000 1,760,000

Cash disbursements:

To suppliers of inventories 450, 000

For various operating expenses 340, 000

To supplier of equipment 200, 000

To stockholders as dividends is 50, 000

To the bank for interest due December 31 60, 000 1, 100, 000

Increase in cash for the period 660, 000

Cash, beginning balance 850, 000
Cash, ending balance 1, 510, 000

Audit notes:

a. Uncollected sales invoices to customers amounted to P125, 000 at the beginning of the year
while the outstanding sales invoices to customers at the end of the year was P250, 000. 5% of
the outstanding receivables at the end of the year was doubtful of collection. Total discount
taken by customers during the year was at P36, 000 while credit memos issued for customer
returns amounted to P59, 000.
 b. Open purchase invoice file at the beginning of the year amounted to P90, 000 while unpaid
purchase invoices at the end of the year totaled P115, 000. Cash discounts taken on purchases
amounted to P45, 000 while credit memos received for purchase returns was P70, 000.
c. Inventories records show that inventories at the beginning and at the end of the year were
P120, 000 and P150, 000, respectively.
d. Accruals and prepayments of operating expenses at the beginning and at the end of the year
were as follows:
Beginning Ending
Prepaid Advertising P12, 000 P15, 000
Prepaid Rent 5, 000 7, 000
Accrued Salaries 20, 000 16, 000

e. The carrying value of the equipment sold at the beginning of the year was at P50, 000. The
replacement equipment acquired at the beginning of the year was estimated to have a 10 year
useful life without salvage value.
f. Advance payments received from customers were P7, 000 and P8, 000 at the beginning and at
the end of the year, respectively. Advance payments made to suppliers of inventories at the end
of the year was P14, 000.

Assuming that you have to convert the company records to accrual basis of accounting, determine the
following under the accrual basis of accounting:

16. Gross sales

a. 1, 354, 000
b. 1, 413, 000
c. 1, 450, 000
d. 1, 449, 000

17. Gross Purchases

a. 590, 000
b. 576, 000
c. 461, 000
d. 596, 000

18. Cost of sales

a. 431, 00
b. 350, 000
c. 406, 000
d. 426, 000

19. Gross Profit

a. 1, 154, 000
b. 1, 023, 000
c. 1, 003, 000
d. 923, 000

20. Total operating expenses (excluding interest expenses)

 a. 363, 500
b. 350, 000
c. 331, 000
d. 381,500

21. Net income

a. 559, 500
b. 539, 500
c. 499, 500
d. 479, 500

22. Total Current Assets

a. 1, 919, 500
b. 1., 932, 000
c. 1, 933, 500
d. 1, 937, 000

PROBLEM 4:
You were assigned to audit the JKL Corporation’s equity accounts and the related capital transactions
for the period ended December 31, 2011. In studying the said transactions you came across the
following entries made by the client.

Date Particulars Debit Credit

Jan. 15 Property and equipment 500, 000
Share capital 500, 000
To record the issuance of 50, 000 shares of
ordinary in exchange of a real property.

Mar. 1 Subscription receivable 190, 000

Share capital 190, 000
To record the subscription of 10, 00 shares of
ordinary at P19 per share subscription price.

Jun. 1 Share capital 75, 000

Cash 75, 000
To record the acquisition of 5, 000 shares of
the company’s own ordinary shares.

July 15 Cash 133, 000

Subscription receivable 133, 000
To record the collection for the full payment
of 70% of the subscribed shares on March 1.

Sept 2 Cash 40, 000

Share capital 40, 000
To record the reissuance of 4, 000 treasury
 shares on hand

Nov 1 Property and equipment 75, 000

Gain from donations 75, 000
To record the receipt of an equipment fairly
valued at P75, 000 from a major stockholder.

Dec 29 Accumulated profits 300, 000

Ordinary Share Option Outstanding 300,000
To record the grant of 10 employees 2, 00
share options valued at fair value of options
on the grant date computed as: (10*2,
000*P15)

Audit Note:
a. The company was authorized to issue 100, 000 share of ordinary at P10 par value.
b. The real property received on January 15, were fairly valued at P1, 500, 000, 40% of which is
attributed to the land
c. A 4 for 1 share split up was declared by the company on August 1. The same has been accounted
for through a memo entry.
d. The options were granted to key employees at beginning of the year and shall be exercisable
after 3 years provided that the employees stay with the company and that revenues by the end
of the third year have increased by 200% based on 2010 revenue. If sales have increased by
200% by the third each employee shall receive 2, 000 options. If Sales have increased by 250%
each employee shall receive 2, 500 options. If sales have increased by 300% on the third year
each employee shall receive 3, 000 options. The company reported revenues of P10M in 2010
and P155M in 2011. The company estimates that this trend is expected to continue by the end
of the third year. Moreover, the company by the end of the third year.
e. On December 5, Board of Directors approved a P0.50 per share cash dividends to stockholders
of record as of December 20 payable on January 30 of the subsequent year.

Required:
23. What is the credit to share premium/additional paid-in capital accounts as a result of the
business of the issuance of shares on January 15?
a. 100, 000
b. 400, 000
c. 500, 000
d. 1, 000, 000

24. The correct entry to record the reissuance of treasury shares on September shall involve:
a. Credit to share premium at P25, 000
b. Credit to share premium at P15, 000
c. Credit share premium at P60, 000
d. Credit to accumulated profits P60, 000
 25. How much is the correct compensation/salaries expense for 2011 as a result of the share
options granted to employees?
a. 87, 500
b. 70, 000
c. 100, 000
d. 105, 000

26. What is the total cash dividends payable as of December 31, 2011?
a. 25, 500
b. 24, 000
c. 112, 000
d. 106, 000

27. What is the adjusted balance of the ordinary shares account as of December 31, 2011?
a. 500, 000
b. 530, 000
c. 570, 000
d. 600, 000

28. What is the total additional paid-in-capital to be reported in the 2011 Statement of Financial
Position?
a. 1, 277, 500
b. 1, 190, 000
c. 1, 202, 500
d. 1, 252, 500

29. How much is the treasury shares to be reported on the 2011 Statement of Financial
Position?
a. 50, 000
b. 60, 000
c. 45, 000
d. 15, 000

PROBLEM 5:
In line with your audit of the MNO Company’s capital transactions for the period ended December 31,
2011, you were furnished by the accountant the following ledger analysis of its Capital account.

Date CAPITAL Debit Credit

1/1/2011 Beginning Balance P4, 450, 000
1/8 Reacquisition of 30, 000 shares at P30 900, 000
2/28 Issue of 20, 000 (previously unissued) P10 par ordinary 500, 000
shares at P25
4/1 Inventory obsolescence loss 200, 000
5/1 2010 accrued operating expenses 40, 000
6/3 Proceeds from reissuance of 5, 000 donated shares 155, 000
7/15 Proceeds from reissuance of 20, 000 treasury shares 440, 000
8/1 Retirement of the remaining treasury shares 460, 000
9/4 Fair value of an equipment received from an unrelated 500, 000
party as a donation
10/1 Declaration and distribution of 30, 000 shares as share 300, 000
dividends, fair value of shares on this date was P25 per
share
12/31 Revaluation Surplus on Properties and Equipment 2, 500, 000
12/31 Change for the period in the value of equity investment to 200, 000
Profit or Loss
12/31 Change for the period in value of equity investment to
Other Comprehensive Income 120, 000
12/31 Net income for the period 1, 235, 600

Audit Notes:
a. The beginning balance of the Capital account comprise of the following items
Total proceeds from 150, 000 ordinary shares issued to date P2, 700, 000
Accumulated profits and losses to date 1, 160, 000
Accumulated increase in the value of its equity investment to OCT 590, 000
b. The reissued donated shares on June 3 were received in the previous period from one of the
company shareholders. The company had no entry in its records upon the receipt of the shares.
c. Based on the company’s records, the treasury shares being retired on August 1 were originally
issued at P10 per share.

Required:
30. The correct entry to record the reissuance of the treasury shares on July 15 shall involve:
a. Credit to share premium at 160, 000
b. Debit to treasury shares at 600, 000
c. Debit to accumulated profits at 160, 000
d. Debit to share premium at 160, 00

31. The correct entry to record the retirement of the remaining treasury shares on August 1
shall involve:
a. Credit to share premium at P100, 000
b. Debit to share premium at P200, 000
c. Debit to accumulated profits at P100, 000
d. Credit to treasury shares at P100, 000

32. What is the adjusted net income for 2011?

a. 1, 235, 600
b. 1, 535, 600
c. 1, 735, 600
d. 1, 695, 600

33. What is the correct accumulated profits balance as of December 31, 2011?
a. 2, 295, 600
b. 2, 105, 600
c. 1, 885, 600
 d. 1, 845, 600

34. What is the total additional paid in capital as of December 31, 2011?
a. 1, 005, 000
b. 2, 000, 000
c. 1, 850, 000
d. 1, 845, 000

35. What is the adjusted balance of the ordinary shares account as of December 31, 2011?
a. 1, 600, 000
b. 1, 900, 000
c. 1, 950, 000
d. 2, 000, 000

36. What is the total stockholders’ equity as of December 31, 2011?

a. 8, 250, 600
b. 8, 720, 600
c. 8, 960, 600
d. 9, 006, 600

PROBLEM 6:
The audit assistant assigned to audit STU’s Corporation Noncurrent Liabilities as of December 31, 2011,
presented to you the following working paper for your review:

Noncurrent Liabilities as of 12/31/2011:

Serial Note payable, June 30, 2009 P300, 000
Term Note payable, January 2, 2010 1, 000, 000
10% bonds payable 5, 000, 000
Liability Under Finance Lease, January 2, 2010 6, 500, 000

Audit notes:
a. The serial notes payable is being paid at P50, 000 plus 10% interest due every July 1 and January
1 of each year. The first payment was made on January 1, 2010 and semi-annually thereafter.
Payments of principal and interest were appropriately made per records. Year-end adjustments
related to the note is yet to be made at year end.
b. The term note payable was 5 year, a non-interest bearing loan from bank originated on January
2, 2010 when the prevailing market rate of interest for similar loan is at 8%. Records revealed
that the difference between the proceeds from the loan and the principal amount credited to
Notes payable was charged to interest expense on January 2, 2010.
c. The 10% Bonds Payable which were originally dated January 1, 2004 had a 15 year term and
pays interest semi-annually every July 1 and January 1. The bonds were issued on January 1,
2009 when the prevailing market rate of interest for similar debt security was 8%. The records
also revealed that the difference between the proceeds from the bond issuance and the face
value of the bonds were charged to interest expense upon issue.
d. The carrying value per books of the Liability under finance lease reflects the total lease payment
to be made for the remaining lease term. The lease agreement requires semi-annual period,
June 30 and December 31. The lease has already run for 2 years as of December 31, 2011.
 Records show that lease payments were recorded as debit to Liability under Finance Lease
account and credit to cash. Asset was capitalized at the total projected lease payments for the
entire lease term and was depreciated over the term of the lease. The implicit rate known to
both parties y the time the lease agreement was entered into was 8%. The useful life of the
asset was 20 years and its fair value by the time the lease was entered into was P4.5M.

Requirements:

37. What is the correct carrying value of the term note payable as of December 31, 2011?
a. 680, 584
b. 735, 031
c. 793, 833
d. 857, 340

38. What is the correct carrying value of the bonds payable as of December 31, 2011?
a. 5, 520, 637
b. 5, 582, 614
c. 5, 528, 156
d. 5, 555, 919

39. What is the retroactive adjustment to retained earnings beginning in relation to your audit
of the Bonds Payable?
a. 582, 614
b. 555, 919
c. 528, 156
d. No adjustment necessary

40. What is the correct carrying value of leased asset as of December 31, 2011?
a. 3, 746, 607
b. 3, 503, 114
c. 3, 995, 693
d. 3, 462, 933

41. What is the correct carrying value of the long term lease liability as of December 31, 2011?
a. 4, 323, 008
b. 4, 165, 765
c. 3, 995, 693
d. 3, 811, 742

42. What is the total current portion of long-term debt to be reported as current liability in the
2011 Statement of Financial Position?
a. 183, 952
b. 170, 074
c. 270, 074
d. 283, 952

43. What is the total interest expense to be reported in 2011 Statement of Comprehensive
Income?
 a. 884, 270
b. 807, 963
c. 864, 270
d. 866, 770

PROBLEM 7:
The following unadjusted balances appear in the current liabilities portion of POR Inc’s Statement of
Financial Position as of December 31, 2011:

Current Liabilities
Accounts Payable, trade P2, 675, 000
Provision for warranties 1, 460, 800
Provision for premium 1, 064, 588
Accrued compensated absences 745, 800
total

Audit notes:
a. The company started its 2-year warranty program on sales starting 2009. The company
estimates that 60% of items sold during the year will ultimately be brought back to the company
for repairs free of any additional charges to customers. The company estimated that it will incur
an average of P200 per unit in parts and labor. The estimated repair cost is expected to increase
at the rate of 10% per year. Relevant information about the warranty program appears below:
2009 2010 2011
Sales in number of units 13, 000 14,000 14, 600
Actual warranty costs 624, 000 1, 323, 200 1, 923, 700

Warranty records reveal that P702, 000 and P152, 000 of the costs incurred in 2010 and 2011
respectively relates to 2009 sales while P943, 00 of costs incurred in 2011 relates to 2010 sales.
The balance of the Provision for warranties account represented the accrual in 2010, adjustments is
yet to be made at year end.

b. The company also started a promotional program in 2009, where upon presentation of
accumulated officials receipts amounting to P5, 000 a customer shall be receiving a gift
certificate (GC) with a face value of P500 each. The gift certificates can be redeemed by
customers to participating department stores up to 3 years from receipt. Department stores are
reimbursement and the face value of the certificates plus 10% processing fee. Relevant
information about this promotional program appears below:
c.
2009 2010 2011
Sales in pesos P45, 500, 000 P56, 875, 000 P69, 560, 000
Actual payments made to Dept 2, 240, 000 3, 790, 000 4, 210, 000
stores

The company estimates that 70% of the accumulated official receipts shall be presented by
customers to receive the GCs 10% of which will never be presented to department stores for
 redemption. The balance of the Provision for Premiums account reflected the year end accrual
in 2010. Adjustment for the current year is yet to be made.

d. Employees are given 15 days vacation and 15 days sick leaves for every year of service. Unused
leaves earned during the current year can be carried over the following year thereafter, the
same shall be fortified. Relevant information about the liability for compensated absences were
as follows:
2009 2010 20111
2008 and prior unused leaves 620 days 125 days 125 days
2009 unused leaves 980 days 540 days 150 days
2010 unused leaves 1, 030 days 620 days
1, 210 days
Average daily salary rate P400 P440 P460

The balance of the accrued compensated absences represented the monetary value of the total
unused leaves at the end of 2010. No adjustments were made to the account at year end.

e. Starting the current year, the BOD has approved the provision for key officers bonus to be
computed at 10% based on adjusted net income after bonus ad after 35% income tax. The
unadjusted net income per records was at P4, 366, 727.

Required:

44. What is the correct estimated liability for warranties as of December 31, 2011?
a. 1, 566, 020
b. 1, 648, 020
c. 1, 112, 100
d. 1, 345, 200

45. What is the correct estimated liability for premiums as of December 31, 2011?
a. 1, 675, 096
b. 1, 345, 096
c. 1, 083, 901
d. 591, 905

46. What is the correct estimated liability for compensated absences as of December 31, 2010?
a. 690, 800
b. 745, 800
c. 704, 000
d. 915, 400

47. What is the correct estimated liability for compensated absences as of December 31, 2011?
a. 910, 800
b. 841, 800
c. 968, 300
d. 915, 400
 48. What is the adjusted net income before bonus and before income tax?
a. 3, 500, 000
b. 3, 445, 000
c. 3, 400, 000
d. 3, 325, 000

49. What is the correct accrued bonus at the end of the year?
a. 213, 615
b. 215, 423
c. 207, 512
d. 202, 934

50. What is the correct net income after tax?

a. 2, 136, 150
b. 2, 154, 230
c. 2, 075, 120
d. 2, 029, 340

Accumulated profits adjusted 1, 582, 456

Approp for treasury at cost (750, 000)
Accumulated profits – unappropriated 778, 456

10. Ans. D
Contributed Capital 19, 000, 000
Unrealized Holding Loss – AFS (500, 000)
Accumulated Profits – total 1, 582, 456
Treasury Shares – cost (750, 000)
Total 19, 278, 456

Total current assets 13, 776, 300

Total noncurrent assets 12, 200, 000 25, 976, 300
Total current liabilities 3, 198, 369
Total noncurrent liabilities 3, 499, 474 6, 697, 843
Total stockholders’ equity 19, 278, 457

PROBLEM 2:
Unadjusted balances 2009 N.I 2011 N.I 2011 RE, 2011 WC 2011 RE,
215, 000 310, 500 BEG ENC
a. Understatement in Accrued Salaries
2009 (20, 000)
2010 22, 000 (22, 000)
2011 (24, 000) (24, 000) (24, 000)
Understatement in Utilities
2009 (2, 900)
2010 3, 200 (3, 200)
 2011 (3, 500) (3, 500) (3, 500)
Understatement in Interest expanse
2009 (11, 600)
2010 13, 400 (13, 400)
2011 (12, 400) (12, 400) (12,400)
Understatement in Interest income
2009 20, 000
2010 (22, 500) 22, 500
2011 25, 000 25, 000 25, 000
b. Understatement in All/Sales
2009 65, 000
2010 (70, 000) 70, 000
2011 50, 000 50, 000 50, 000
Overstatement in Inventories
2009 (45, 500)
2010 45, 500 (45, 500)
2011 (30,000) (30,000) (30, 000)
c. Understatement in Advances from
Customer
2009 (19, 400)
2010 21, 500 (21, 500)
2011 (20, 000) (20, 000) (20, 000)
d.Understatement in Supplies
2009 2, 900
2010 (4, 000) 4, 000
2011 3, 500 3, 500 3, 500
Understatement in Prepaid Advertising
2009 6, 700
2010 (5, 000) 5, 000
2011 2, 100 2, 100 2, 100
e.Understatement in Depreciation (15, 000) (15, 000) (30, 000) (45, 000)
expenses
f.Dividends payable at year end
2010 (100, 000)
2011 (150, 000) (50, 000)
Balances 195, 200 290, 800 (134, 100) (159, 800) 408, 600

11. Ans. A
12. Ans. A
13. Ans. B
14. Ans. B
15. Ans. C

PROBLEM 3:
16. Ans. D
Cash collections from customers 1, 230, 000
Add: Sales discounts 36, 000
Sales returns 59, 000
Advances from customers, beginning 7, 000
Accounts receivable, ending 250, 000
Total 1,582, 000
Less: Advances from customers, ending (8, 000)
Accounts receivable, beginning (125, 000)
Gross Sales 1, 449,000

17. Ans. B.
Cash payments to supplies of inventories 450, 000
Add: Purchase discounts 45, 000
Purchase returns 70, 000
Accounts payable, beginning 115, 000
Total 680, 000
Less: Advances to suppliers, ending (14, 000)
Accounts payable, beginning (90, 000)
Gross Purchases 576, 000

18. Ans. A
Inventory, beg. 120, 000
Net Purchases 461, 000
Inventory, end (150, 000)
Cost of Sales 431,000

19. Ans. D.
Net Sales 1,345, 000
Cost of Sales (431, 000)
Gross Profit 923, 000

20. Ans. A.
Cash payment for operating expenses 340, 000
Add: Accrued expense ending 16, 000
Prepayments, beginning 17, 000
Less: Accrued expense, beginning (20, 000)
Prepayments, ending (22,000)
Accrual basis operating expenses 331, 000
Depreciation (200, 000/10) 20, 000
Bad debt expense (250, 000* 5%) 12, 500
Total operating expense 363, 500

21. Ans. D
Gross Profit 923, 000
Operating Expenses (363, 500)
Loss on sale of equipment (30, 000 – 50, 000) (20, 000)
Interest expense (60, 000)
Net income 479, 500
22. Ans. C
Cash 1, 510, 000
Receivable, net 237, 500
Advances to supplier 14, 000
Inventories 150, 000
Prepayments 22, 000
Total Current Assets 1,933,500

PROBLEM 4:
23. Ans. D
Correct entry:
Land (1, 500, 000 * 40%) 600, 000
Building 900, 000
Ordinary Shares (50, 000 * 10) 500, 000
Share Premium – ordinary shares 1, 000,000

24. Ans. A.
Correct entry:
Cash 40, 000
Treasury shares (75, 000/20, 000)*4, 000 15, 000
Share premium – treasury shares 25, 000
Note: reissuance happened after a 4 for share split

25. Ans. A
Estimated Revenue in 2013:
Actual revenue, 2011 155, 000, 000
Actual revenue, 2010 100, 000, 000
Increase for 2011 55, 000, 000
% increase for 2011 55%

Projected revenue in 2012 (155M*1.55) 240, 250, 000

Projected revenue in 2013 (240.25M*1.55) 372, 387, 500
Actual revenue 2010 100, 000, 000
Projected difference 2013 vs 2010 272, 387, 500
% increase in 2013 based on 2011 revenue 272%
Number of option per employee 2, 500
Number of expected employee remaining 7
Total estimated options 17, 500
Multiply by fair value 15
Total option value 262, 500
Divide by vesting period 3
Compensation expense for 2011 87, 500

26. Ans. C
Number of shares Outstanding Subscribed total
Jan. 15 share issue 50, 000
Mar 1 share subscription 10, 000
Jun 1 share reacquisition (5, 000)
Jul 15 subs full payment share issue 7, 000 (7, 000)
Balance 52, 000 3, 000
Aug 1 (share split: 4 for 2) (52, 000) (3, 000)

208, 000 12, 000

Sept 2 treasury reissue 4, 000
Balance by Dec. 5 212,000 12,000 224, 000
Multiply by dividend rate per share 0.50
Total cash dividends payable 112, 000

27. Ans. C.
Number of Share issued 228, 000
Par value (P10/4, as a result of split) 2.50
Aggregate par value of share issued 570, 000

28. Ans. A
Share premium – ordinary shares 1, 090, 000
Share premium – treasury 25, 000
Donated Capital 75, 000
Ordinary share warrants outstanding 87, 500
Total APIC 1,277, 500

29. Ans. B.
Treasury shares at cost 60, 000
(75, 000 – 15, 000)

PROBLEM 5:
30. Ans. C.
Correct entry:
Cash 440, 000
Accumulated Profits 160,000
Treasury shares (20, 000*30) 600, 000

31. Ans. C.
Correct entry:
Ordinary Shares (10, 000*10) 100, 000
Share premium ordinary (10, 000*10) 100, 000
Accumulated Profits 100, 000
Treasury Shares (10, 000*30) 300, 000

32. Ans. C
Unadjusted Net income 1, 235, 600
Inventory loss (200, 000)
Donation from unrelated party – Gain 500, 000
Unrealized gain on trading securities 200, 000
Adjusted Net Income 1, 735, 600
33. Ans. D
Accumulated profits, beginning 1, 160, 000
Prior period error (40, 000)
Capital loss on reissue of treasury shares (160,000)
Capital loss on retirement of treasury shares (100, 000)
Share dividends (30, 000%25) (750, 000) (small30, 000/160, 000 = 18.75%)
Net income 1, 735, 600
Accumulated profits, end 1, 845, 600

34. Ans. A
Share premium, beginning 1, 200, 000 (2, 700, 000 – 1, 500, 000)
Share premium – reissuance during the year 300, 000 20, 000*15
Proceeds from issuance of donated shares 155, 000
Retirement of treasury (100, 000)
Share premium from share dividends 450, 000
Total APIC, end 2, 005, 000

35. Ans. B
Ordinary shares (190, 000sh at P10) 1, 900, 000

36. Ans. B
Ordinary shares 1, 900,000
Additional-paid-in-capital 2, 005,000
Revaluation Surplus 2, 500, 000
Unrealized gain on AFS 470, 000 (50, 000 – 120, 000)
Accumulated Profits 1, 845, 600
Total Stockholders’ Equity 8, 720, 600

PROBLEM 7:
37. Ans. C
Amortization table:
Date CV*8% Balance
1/1/2010 Proceeds (1, 000, 000*0.6808) 680, 584
2010 Amortization/Current Interest Expense 54, 447 735, 031
2011 Amortization/Current Interest Expense 58, 802 793, 833
2012 Amortization/Current Interest Expense 63, 507 857, 340
2013 Amortization/Current Interest Expense 68, 587 925, 927
2014 Amortization/Current Interest Expense 74, 074 1, 001, 001

38. Ans. C
Amortization table
Date Nominal Inter Correct Inter Premium Amo Balance
1/1/09 Proceeds: (5, 000, 000*0.4564) + (250, 000*13.5903) 5, 679, 516
7/1/09 Amortization 250, 000 227, 181 22, 819 5, 656, 697
1/1/10 Amortization 250, 000 325, 368 23, 732 5,682, 965
7/1/10 Amortization 250, 000 225, 319 24, 681 5, 608, 283
1/1/11 Amortization 250, 000 224, 831 25, 669 5, 582, 614
7/1/11 Amortization 250, 000 23, 305 26, 695 5, 555, 919
1/1/12 Amortization 250, 000 222, 237 27, 763 5, 528, 156

39. Ans. A
Interest Expense per books 2009 (500, 000 – 679, 516) (179, 516)
Interest Expense per books 2010 500, 000
Total accum interest expense 2009 and 2010 320, 484
Correct interest expense per audit 2009 453, 449
Correct interest expense per audit 2010 449, 650 903, 098
Retroactive adjustment to RE, beg (debit) 582, 614

40. Ans. A
PV of MLP (250, 000*17.292033) 4, 323,008
Multiply by: Condition per cent (13/15) 13/15
CV of asset as of 12/31/2011 3, 746, 607

41. Ans. C
Amortization table Periodic Paym Interest Principal Balance
1/1/2010 PV of MLP 4, 323, 008
6/30/2010 Per. Paymt 250, 000 172, 920 77, 080 4, 245, 928
12/31/2011 Per. Paymt 250, 000 169, 837 80, 163 4, 165, 765
6/30/2011 Per. Paymt 250, 000 166, 631 83, 369 4,082, 396
12/31/2011 Per. Paymt 250, 000 163, 296 86, 704 3, 995, 692
6/30/2012 Per. Paymt 250, 000 159, 828 99, 172 3, 905, 520
12/31/2012 Per Paymt 250, 000 156, 221 98, 221 3, 811,740

42. Ans. D
Serial note payable – current portion 100, 000
6/30/2012 for Paymt 90, 172
12/31/2012 Per. Paymt 93, 779 183, 952
Total current portion of long term debt 283, 952

43. Ans. D
Interest on Serial Note:
1/1-6/30/2011: 350, 000*10%*6/12 17, 500
7/1-12/31/2011: 300, 000*10%*6/12 15, 000 32, 500
Interest on Term Note (see amo above) 58, 802
Interest on Bonds Payable 445, 541
Interest on Lease Liability 329, 926
Total interest Expense 866, 770

PROBLEM 7:

44. Ans. A
Estimated Warranties Expense 2010 2011
2010: (14,000*220*60%) 1, 848, 000
2011: (14, 600*242*60%) 2, 119, 920
Total payments made to date
2010: (1, 323, 200 -702, 000) 621, 200
2011: 943, 000
2011: (1, 932, 700 – 152, 000 – 943, 000) 837, 700
Balance of Liability still probable 283, 800 1, 282, 220 1, 566, 020
*note that warranty is for two years only, therefore, those coming from 2009 is no longer probable
come 2012.

45. Ans. A
Total sales in three years 171, 935, 000
Divide by: 5, 000
Maximum GC to be distributed 34, 387
Multiply by 70% 70%
Probable GCs to be distributed 24, 071
Multiply by 90% 90%
Probable GCs to be redeemed thru dep. Store 21, 664
Multiply by Face value of GCs 500
Total face value of GCs 10, 831, 905
Add: 10% processing fee 1, 083, 191
Total Expense in 3 years 11, 915, 096
Less: Total Payments to date 10, 240, 000
Estimated premium liability 1, 675, 096

46. Ans. A
Liability for Compensated Absence 2010 (1, 570*P440) 690, 800

47. Ans. B
Liability for Compensated Absence 2011 841, 800

48. Ans. A
Unadjusted Net income 4, 336, 727
AJE 1: (1, 460, 800 – 1, 566, 020) (105, 220)
AJE 2: (1, 064, 588 – 1, 675, 096) (610, 507)
AJE 3: (841, 800 – 690, 800) (151, 000)
Adjusted Net Income 3, 500, 000

49. Ans. A
B= 10% (3, 500, 000 – B – TX)
TX= 35% (3, 500, 000 – B)
B= 10% (3, 500, 000 – B – 35% (3, 500, 000 – B)
B= 10% (3, 500, 000 – B – 1, 225, 000 + 35B)
B= 227, 500 - .065B
1.0658 = 227, 500
B= 213, 615

50.Ans.