Problem 1

You were able to gather the following from the December 31, 2010 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 P10,000 returned by bank on December 26, 2010 due to
insufficient fund but subsequently redeposited and cleared by bank on January 8, 2011.
b. Customer’s check for P20,000 dated January 2, 2011, received on December 29, 2010.
c. Postal money orders received from customers, P30,000.
The petty cash fund consisted of the following items as of December 31, 2010.
Currency and Coins P 2,000
Employee’s 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 petty cashier 4,000
P10,000
Included among the checks drawn by Mandaluyong Corporation against the BPI current account
and recorded in December 2010 are the following:
a. Check written and dated December 29, 2010 and delivered to payee on January 2, 2011,
P80,000.
b. Check written on December 27, 2010 dated January 2, 2011, delivered to payee on
December 29, 2010, 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, 2010.
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 after the end of
the reporting period.
Questions:
Based on the above and the result of your audit, determine the adjusted balanced of the
following:
1. Cash on Hand 3. BPI Current Account
a. P410,000 a. P1,000,000
b. P530,000 b. P1,120,000
c. P470,000 c. P1,080,000
d. P440,000 d. P1,040,000
2. Petty Cash Fund 4. Cash and Cash Equivalents
a. P6,000 a. P2,917,000
b. P7,200 b. P3,074,000
c. P2,000 c. P3,052,000
d. P4,900 d. P3,066,000
Answer:
1) D; 2) A; 3) B; 4) D
Solution:
Q1:
Unadjusted cash on hand P500,000
NSF check (40,000)
Postdated check received (20,000)
Adjusted cash on hand P440,000

Q2:
Petty cash fund per total P10,100
Employees’ vales (IOU) (1,600)
Currency in envelope marked “collections for
charity” (1,200)
Unreplenished petty cash vouchers (1,300)
Petty cash fund, as adjusted P6,000
Q3:
Unadjusted BPI current account P1,000,000
Unreleased check 80,000
Postdated check delivered 40,000
Adjusted BPI current account P1,120,000
Q4:
Cash on hand (see no. 1) P440,000
Petty Cash Fund (see no. 2) 6,000
BPI current account (see no. 3) 1,120,000
Security Bank current account (net of overdraft of
P80,000) 1,000,000
PNB time deposit 500,000
Cash and Cash Equivalents, as adjusted P3,066,000
Problem 2
Listed below are some items of inventory from Anecito Company that are in question during the
audit. The company stores a substantial portion of the merchandise in a separate warehouse and
transfer damaged goods to a special inventory account.
1. Items in receiving department returned by customer, no communication received from
customer 20,000
2. Items ordered and in receiving department, invoice not yet received from supplier
50,000
3. Items counted in warehouse by the inventory crew 70,000
4. Invoice received for goods ordered, goods shipped but not received
(Anecito Company pays freight) 5,000
5. Items, shipped today, fob destination, invoice mailed to customer 5,000
6. Items currently used for window displays 10,000
7. Items on counter for sale per inventory count [not in (3)] 90,000
8. Items in shipping department, invoice not mailed to customer 6,000
9. Items in receiving department, refused by Anecito because of damage [(not in (3)]
3,000
10. Items shipped today, fob shipping point, invoice mailed to customer 4,000
11. Items included in warehouse count, damaged, not returnable 8,000
12. Items included in warehouse count, specifically crafted and segregated for shipment
to customer in five days per sales contract, with return privilege. 18,000

Questions:
1. If the recorded inventory in the balance sheet is P289,000, the year-end inventory will be
overstated by:
a. P 41,000 b. P 23,000 c. P 18,000 d. P 3,000
2. The following should be included from the inventory, except:
a. Inventory shipped today, f.o.b. shipping point, invoice mailed to customer.
b. Inventory counted in warehouse by the inventory crew.
c. Inventory shipped today, f.o.b. destination, invoice mailed to customer.
d. Inventory in warehouse count, specifically crafted and segregated for shipment to customer
with return privilege.
3. The inventory per audit at year-end is:
a. P 286,000 b. P 271,000 c. P 266,000 d. P 248,000
Answer:
1) B; 2) A; 3) C
Solution:
1. P20,000
2. 50,000
3. 70,000
4. 5,000
5. 5,000 (the fact that Anecito pays the freight, the term then is FOB shipping point)

6. 10,000
7. 90,000
8. 6,000
9. -
10. -
11. (8,000)
12. 18,000 (this is still included in the inventory since the goods has a return privilege)
Total P266,000

Explanation: Despite the goods in Item 12 being specially crafted and segregated for a
customer, this will still be included in the inventory count due to the presence of a “return
privilege.”
Problem 3
The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value
(NRV). The inventory accounts at December 31, 2009, had the following balances.
Raw Materials P 650,000
Work in Process 1,200,000
Finished Goods 1,640,000
The following are some of the transactions that affected the inventory of the Bolinao Company
during 2010.
Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade
discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net
invoice price.
Feb. 14 Bolinao repossessed and inventory item from a customer who was overdue in making
payment. The unpaid balance on the sale is P15,300. The repossessed merchandise is
to be refinished and placed on sale. It is expected that the item can be sold for P24,000
after estimated refinishing costs of P6,800. The normal profit for this item is
considered to be P3,200
Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item.
Apr. 3 The repossessed item was resold for P24,000 on account, 20% down.
Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a
cost P38,400. A reduction of P8,000 off the list price was granted as a trade-in
allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit
on this type of inventory is 25% of the sale price.
Questions:
Based on the above and the result of your audit, answer the following: (Assume the client is
using perpetual inventory system)
1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of:
a. P200,000 b. P144,0000 c. P141,120 d. P196,000
2. The repossessed inventory on Feb. 14 is most likely to be valued at:
a. P14,000 b. P24,000 c. P17,200 d. 14,400

3. The journal entries on April 3 will include a:

a. Debit to Cash of P24,000
b. Debit to Cost of Repossessed Goods Sold of P14,000
c. Credit to Profit on Sale of Repossessed Inventory of P3,600
d. Credit to Repossessed Inventory of P20,400

4. The trade-in inventory on Aug. 30 is most likely to be valued at:

a. P8,000 b. P4,800 c. P6,000 d. P6,400

5. How much will be recorded as Sales on Aug. 30?

a. P51,200 b. P56,000 c. P57,200 d. P57,600
Answer:
1) C 2) A 3) D 4) B 5) B
Solution:
Q1:
Amount to be debited to Raw Materials Inventory (P200,000 x .8 x .9 x .98) P141,120
Q2:
Estimated selling price P24,000
Less: Refinishing Costs 6,800
Net Realizable Value 17,200
Less: Normal Profit 3,200
Valuation of repossessed inventory P14,000
Q3:
Journal Entries on April 3, 2010:
Cash (P24,000 x 20%) P4,800
Accounts Receivable (24,000 – 4,800) 19,200
Sales – Repossessed Inventory P24,000
Cost of Repossessed Goods Sold (14,000+6,400) P20,400
Repossessed Inventory P20,400
Q4:
Estimated selling price (net realizable value) P6,400
Less: Normal Profit (P6,400 x 25%) 1,600
Valuation of trade-in inventory P4,800
Q5:
Accounts receivable (P59,200 – P8,000) P51,200
Trade-in Inventory (see no. 4) 4,800
Amount to be recorded as sales P56,000

Explanation: Repossessed inventory is valued at fair value or best possible approximation of

fair value. Since fair value of the item is not given, the item was valued at net realizable value
less the normal profit. Incidentally, this is also the valuation of trade-in inventory.
Problem 4
Your new audit client, Guimba Company, prepared the trial balance below as of December 31,
2010. The company started its operations on January 1, 2009. Your examination resulted in the
necessity of applying the adjusting entries indicated in the additional data below.
Guimba Company
Trial Balance
December 31, 2010
Debits Credits
Cash P 510,000
Accounts Receivable – net 600,000
Inventories, December 31, 2009 669,000
Land 660,000
Buildings 990,000
Accumulated Depreciation, building P 19,800
Machinery 444,000
Accumulated Depreciation, machinery 45,000
Sinking fund assets 75,000
Bond discount 75,000
Treasury shares 105,000
Accounts payable 567,000
Accrued bond interest 11,250
First mortgage, 6% sinking fund bonds 679,500
Share capital 1,500,000
Share premium 150,000
Donated shares 180,000
Retained earnings, December 31, 2009 222,450
Net sales 2,625,000
Purchases 850,500
Salaries and wages 507,000
Factory operating expenses 364,500
Administrative expenses 105,000
Bond interest 45,000
6,000,000 6,000,000
Additional data are as follows:
(1) The 1,500,000 share capital was issued at a 10 percent premium to the owners of the land
and buildings on December 31, 2008, the date of organization. Shares with a par value of
180,000 were donated back by the vendors. The following entry was made:
Treasury shares P180,000
Donated shares P180,000
The shares were donated because the proceeds from its subsequent sale were to be
considered as an allowance on the purchase price of land and buildings in proportion to
 their values as first recorded. The treasury shares were sold in 2010 for P75,000, which
was credited to Treasury shares.
(2) On December 31, 2010. A machine costing P15,000 when the business started was
removed. The machine had been depreciated at 10 percent during the first year. The only
entry made was one crediting the Machinery account with its sales price of P6,000.
(3) Depreciation is to be provided on the straight-line basis, as follows: buildings, 2 percent of
cost; machinery, 10 percent of cost. Ignore residual values.
Questions:
1. The correct balance of Land account as of December 31, 2010 is:
a. P660,000 b. P588,000 c. P630,000 d. P 0
2. The adjusted carrying amount of Building as of December 31, 2010 is:
a. P907,200 b. P950,400 c. P905,400 d. P945,000
3. The adjusted carrying amount of Machinery as of December 31, 2010 is:
a. P399,000 b. P345,000 c. P354,000 d. P348,000
4. The adjusted depreciation expense for 2010 is:
a. P64,800 b. P62,400 c. P63,900 d. P63,000
5. How much is the gain or loss on sale of machinery on December 31, 2010?
a. P6,000 loss b. P7,500 loss c. P6,000 gain d. P7,500 gain
Answer: 1) C 2) A 3) D 4) C 5) A
Solution:
Q1:
Land Building Total
Unadjusted balances P660,000 P990,000 P1,650,000
Proceeds from sale of Donated shares applied as
deduction from:
Land (75,000 x 660/1,650) (30,000) (30,000)
Building (75,000 x 990/1,650) (45,000) (45,000)
Adjusted Balances P630,000 P945,000 P1,575,000

Q2:
Adjusted cost of buildings (see no. 1) P945,000
Less: Accumulated depreciation, 12/31/10 (945,000 x 2% x 2) 37,800
 Carrying amount of building, 12/31/10 P907,200

Q3:
Machinery, 1/1/10 (444,000 + 6,000) P450,000
Less: Machinery sold on 12/31/10 15,000
Machinery, 12/31/10 435,000
Less: Accumulated depreciation, 12/31/10 (435,000 x 10% x 2) 87,000
Carrying amount of machinery, 12/31/10 P348,000

Q4:
Depreciation on Building (945,000 x 2%) P18,900
Depreciation on Machinery (P450,000 x 10%) 45,000
Total depreciation expense for 2010 P63,900

Q5:
Sales proceeds P6,000
Less: Carrying value 12/31/10
Cost P15,000
Less: Accumulated depreciation (15,000 x 10% x 2) 3,000 12,000
Loss on Sale of machinery P6,000

Explanation: The proceeds received from sale of donated shares will not be credited to Share
Premium (Donated Capital) account since this involves “Treasury stock subterfuge.” This occurs
when excessive shares are issued for a property with the understandings that the shareholders
shall subsequently donate a portion of their shares.
Problem 5
The “CASH” account of Don Corporation’s ledger on December 31, 2006 showed the
following:
a. Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is dated January 3,
2007) P 15,000
b. Redemption Fund Account – PNB 500,000
c. Traveler’s check 100,000
d. Money order 10,000
e. Treasury bill, purchased December 1, 2006 (due on Feb. 1, 2007) 50,000
f. Time deposit due on March 31, 2007 50,000
g. 180-day Treasury bill, due March 15, 2007 120,000
h. Note receivable in the possession of a collecting agency 20,000
i. PNB – Checking Account #211-009-091 325,900
j. Cash on hand, including customer postdated check of P15,000 23,000
k. Savings deposit, earmarked for acquisition of equipment 210,000
l. A check payable to San Ignacio Incorporated, dated January 5, 2007, that was included in the
December 31 PNB Checking Account #211-009-091 50,000
m. Bond Sinking Fund (used to finance the maturing long-term obligation on March 31, 2007)
150,000
n. Overdraft in PNB Checking Account #211-099-085 ( 50,000)
o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2006 not mailed until January 5,
2007 20,000
p. Advances to Officers/Employees for Seminars (no liquidation is
required) 80,000
q. Money market placement (due June 30, 2007) 600,000
r. Listed stock held as temporary investment 100,000
s. Check #789 in payment to Suppliers, dated January 5, 2007 and recorded December 31, 2006.
35,000
t. Customers’ certified checks 10,000
u. Pension Fund 150,000
TOTAL CASH 2,568,900

Questions
1. The entry to correct/adjust item F is:
a. Investment 50,000
Cash 50,000
b. Other assets 50,000
Cash 50,000
c. Short-term investment 50,000
Cash 50,000
d. No adjustment
2. The entry to correct/adjust item L is:
a. Accounts payable 50,000
Cash 50,000
b. Cash 50,000
Other liabilities 50,000
c. Cash 50,000
Accounts payable 50,000
d. No adjustment
3. The entry to correct/adjust item M is:
a. Investment 150,000
Cash 150,000
b. Other assets 150,000
Cash 150,000
c. Short-term investment 150,000
Cash 150,000
d. No adjustment
4. DON CORPORATION’S cash and cash equivalents balance at December 31, 2006 is:
 a. Overstated by P1,950,100 c. Overstated by P 1,845,100
b. Overstated by P 1,895,100 d. Overstated by P 1,795,100
5. DON CORPORATION’S adjusted cash and cash equivalents balance at December 31, 2006 is:
a. P 618,800 b. P 623,800 c. P 673,800 d. P 723,800
Solution
a. Operating expenses 5,100
Cash 5,100 l. No adjustment
b. Investment 500,000 m. Investment – current 150,000
Cash 500,000 Cash 150,000
c. No adjustment n. No adjustment
d. No adjustment o. No adjustment
e. No adjustment p. Operating expenses 80,000
f. No adjustment Cash 80,000
g. Short-term investment 120,000 q. Short-term investment 600,000
Cash 120,000 Cash 600,000
h. Notes receivable 20,000 r. Short-term investment 100,000
Cash 20,000 Cash 100,000
i. No adjustment s. No adjustment
j. Accounts receivable 15,000 t. No adjustment
Cash 15,000 u. Investment 150,000
k. Cash – restricted 210,000 Cash 150,000
Cash 210,000
Problem 6
The shareholder’s equity of the Amongan Lumber Co. on June 30, 2004, was as follows:
Contributed capital:
5% preference share, P50 par, cumulative, 30,000 shares
issued, dividends 5 years in arrears P1,500,000
Ordinary share, P30 par, 100,000 shares issued 3,000,000
P4,500,000
Deficit from operations (600,000)
Total shareholder’s equity P3,900,000

On July 1, the following actions were taken:

a. Ordinary shareholders turned in their old Ordinary share and received in exchange new ordinary
share, 1 share of the new share being exchanged for every 4 shares of the old. New ordinary share
was given a stated value of P60 per share.
b. One-half share of the new ordinary share was issued on each share of preference share
outstanding in liquidation of dividends in arrears on preference share.
c. The deficit from operations was applied against the paid-in capital arising from the ordinary
share restatement.
Transactions for the remainder of 2004 affecting the shareholders’ equity were as follows:
Oct. 1 10,000 shares of preference share were called at P55 plus dividends for 3 months
at 5%. Share was formally retired.
Nov. 10 60,000 shares of new ordinary share were sold at P65.
Dec. 31 Net income for the 6 months ended on this date was P400,000. (Assume that
revenues and expenses were closed to a temporary account, Income summary. Use
this account to complete the closing process.) The semiannual dividend was
declared on preference shares, and a P0.75 dividend on ordinary shares, dividends
being payable January 20, 2003.
Questions
Based on the information above, answer the following questions:
1. The balance of 5% Preference Share at December 31, 2004 is:
a. P 1,500,000 b. P 1,000,000 c. P 500,000 d. P 0
2. The balance of Ordinary Share at December 31, 2004 is:
a. P 3,000,000 b. P 4,000,000 c. P 4,500,000 d. P 6,000,000
3. The balance of Additional paid in capital at December 31, 2004 is:
a. P 0 b. P 300,000 c. P 1,500,000 d. P 1,800,000
4. The balance of Retained Earnings at December 31, 2004 is:
a. P 0 b. P (600,000) c. P 243,750 d. P 293,750
Solution
July 1 Ordinary share, P30 par 3,000,000
Ordinary share, P60 stated value 1,500,000
Exchanged 100,000 shares of old ordinary share with a par value of P30
for 25,000 shares of new ordinary share with a stated value of P60.
July 1 Retained earnings 900,000
Ordinary share, P60 stated value 900,000
Eliminate dividends in arrears on preference share through issuance of
15,000 shares of new ordinary share.
July 1 Paid-in capital in excess of stated value 1,500,000
Retained earnings 1,500,000
Applied deficit against paid-in capital created through recapitalization
Oct 1 5% Preference share 600,000
Retained earnings 56,250
Cash 556,250
Retired 10,000 shares of preference share 10,000 shares preference share
retired: Amount paid (10,000 shares x P55) P550,000
Dividends for 3 months (P500,000 x .05 x 3/12) 6,250 P 556,250
Nov 10 Cash 3,900,000
Ordinary share, P60 stated value 3,600,000
Paid-in capital in excess of stated value 300,000
Sold 60,000 shares of ordinary share P65.
Dec 31 Income summary 400,000
Retained earnings 400,000
Recorded earnings for the 6-month period ended December 31.
Dec 31 Dividends (Retained earnings) 100,000
Dividend payable – preference 25,000
(20,000 x P50 x .05 x ½)
Dividend payable – ordinary 75,000
 (100,000 shares x P.75)
SHAREHOLDERS’ EQUITY
Contributed Capital
5% preference share 1,000,000
Ordinary share 6,000,000
Paid-in capital in excess of stated value – ordinary 300,000
Total 7,300,000
Retained earnings (accumulated since July 1, 2002) 243,750
Total Shareholders’ Equity 7,543,750

On July 1, 2004, 100,000 shares of ordinary share, P30 par, were exchanged for 25,000 shares of
ordinary share with a P60 stated value, thus creating additional paid-in capital. Such paid-in
capital was applied to the elimination of a P600,00 deficit on this date and also the liquidation of
dividends in arrears on preference share of P900,000 through the issue of 15,000 shares of new
ordinary. Earnings since July 1, 2004, were P400,000. Charges for dividends since this date were
P106,250, and the call premium on 10,000 shares of preference share redeemed was P50,000,
resulting in a retained earnings balance of P243,750.
Problem 7
Wizard Company, a calendar-year sole proprietorship, maintained its books on the cash basis
during the year.
Wizard is in the process of negotiating a bank loan to finance the planned expansion of its business.
The bank is requesting 2006 financial statements prepared on the accrual basis of accounting from
Wizard. As Wizard’s external auditor, you were called upon to assist in preparing the financial
statements. The following information were obtained during the course of your engagement:
Wizard Company
TRIAL BALANCE
December 31, 2006
DEBITS CREDITS
Cash P448,000
Accounts Receivable, 12/31/05 283,500
Inventory, 12/31/05 1,085,000
Furniture & Fixtures 2,068,500
Leasehold Improvements 787,500
Accumulated Depreciation P 567,000
Accounts Payable 297,500
Wizard, Drawings
Wizard, Capital, 12/31/05 2,180,500
Sales 11,427,500
Purchases 5,339,250
Salaries Expense 3,045,000
Taxes and License 217,000
Insurance Expense 152,250
Rent Expense 598,500
Utilities Expense 220,500
Living Expenses 227,500
P 14,472,500 P 14,472,500
Additional information:
1. At December 31, 2006, amounts due from customers totaled P415,000.
2. Based on the analysis of the above receivables, P20,750 may prove uncollectible.
3. Unpaid invoices for the plant purchases totaled P533,750 and P297,500 at December 31, 2006
and December 31, 2005 respectively.
4. The inventory totaled P1,274,000 based on a physical count of the goods at December 31, 2006.
The inventory was priced at cost, which approximates market value.
5. On May 1. 2006, Wizard paid P152,250 to renew its comprehensive insurance coverage for one
year. The premium on the previous policy, which expired on April 30, 2006, was P136,500.
6. On January 2, 2006, Wizard entered into a twenty-year operating lease for the vacant lot adjacent
Wizard’s retail store used as a parking lot. As agreed in the lease, Wizard paved and fenced in the
lot at a cost of P787,500. The improvements were completed on April 1, 2006, and estimated to
have a useful life of fifteen years. No provision for depreciation has been recorded. Depreciation
on furniture and fixtures was P210,000 for 2006.
7. Accrued expenses at December 31, 2006 and 2005 were as follows:
2006 2005
Taxes and licenses P33,750 P20,250
Utilities 36,000 24,750
P69,750 P45,000
8. Wizard is being sued for P4,000,000. The coverage under the comprehensive insurance policy
is limited to P2,500,000. Wizard’s attorney believes that an unfavorable outcome is probable and
that a reasonable estimate of the settlement is P3,000,000.
9. The salaries account includes P40,000 per month paid to the proprietor. Wizard also receives
P4,375 per week for living expenses.
Questions
Determine the balances of the following under the accrual basis of accounting.
1. Accounts Receivable
a. 415,000 b. P 283,500 c. P 131,500 d. P 152,000
2. Accounts Receivable, net
a. P 408,425 b. P 404,625 c. P 394,250 d. P 262,500
3. Inventory
a. P 1,274,000 b. P 1,085,000 c. P 189,000 d. P 896,000
4. Prepaid Insurance
a. P 147,000 b. P 96,250 c. P 50,750 d. P0
5. Property and equipment, net
a. P 2,856,000 b. P 2,616,469 c. P 2,039,625 d. P 1,858,500
6. Accounts payable
a. P 533,750 b. P 523,750 c. P 297,500 d.P 236,250
7. Accrued Expenses
a. P 114,750 b. P 69,750 c. P 24,750 d. P0
8. Wizard, Drawings
a. P 707,500 b. P 480,000 c. P 227,500 d. P0
9. Wizard, Capital, 12/31/05
a. P 2,226,000 b. P 2,181,000 c. P 2,180,500 d. P 2,135,500
10.Sales
a. P 11,842,500 b. P 11,559,000 c. P 11,427,500 d. P 11,296,000
11. Purchases
a. P 5,873,000 b. P 5,575,500 c. P 5,339,250 d. P 5,103,000
12.Salaries Expense
a. P 3,272,500 b. P 3,045,000 c. P 2,655,000 d. P 2,565,000
13. Taxes and licenses
a. P 250,750 b. P 230,500 c. P 217,000 d. P 203,500
14. Insurance expense
a. P 197,750 b. P 147,000 c. P 152,250 d. P 101,500
15. Utilities expense
a. P 256,500 b. P 231,750 c. P 220,500 d. P 195,750
16. Doubtful account expense
a. P 20,750 b. P 10,375 c. P 6,575 d. P 0
17. Depreciation expense
a. P 294,375 b. P 249,375 c. P 239,531 d. P 210,000
18.Cost of sales
a. P 5,386,500 b. P 5,368,500 c. P 5,150,250 d. P 4,065,000
19. Estimated loss from lawsuit
a. P 4,000,000 b. P 3,000,000 c. P 500,000 d. P0
Solution
1. A - P415,000 given in item no. 1
2. C - P394,250 (P415,000 – P20,750 item no. 2)
3. A - P1,274,000 given in item no. 4
4. C - P152,250 x 4/12 = P50,750
5. C
Furniture & fixtures 2,068,500
Leasehold improvements 787,500
 Less: Accumulated dep’n – 1/1/02 ( 567,000)
2002 Depreciation – improve ( 39,375)
2002 Dep’n – furniture ( 210,000)
Carrying value – 2002 2,039,625

6. A - P533,750 given in item no. 3

7. B - P69,750 given in item no. 7
8. A
Salaries – P40,000 x 12 - P 480,000
Living allowance P4,375 x 52 weeks 227,500
Total 707,500

9. B
Capital – beg. 2,180,500
Omission of prepaid expense in 2001 45,500
Omission of accrued expenses in 2001 ( 45,000)
Total 2,181,000

10. B
Sales – cash basis 11,427,500
+ AR – end 415,000
- AR – beg 283,500
Sales- Accrual basis 11,559,000

11. B
Purchases – cash basis 5,339,250
+ AP – end 533,750
- AP – beg 297,500
Purchases- Accrual basis 5,575,500

12. D
Salaries per record 3,045,000
Less: Salaries of the proprietor* 480,000
Adjusted Salaries 2,565,000
* Salaries of the proprietor for a partnership is considered as part of profit distribution
13. B
Taxes and Licenses – cash basis 217,000
+ Accrued taxes – end 33,750
 - Accrued taxes – beg 20,250
Taxes and Licenses- accrual basis 230,500

14. B
Insurance expense – cash basis - 152,250
+ Prepaid insurance – beg - 45,500
- Prepaid insurance – end - 50,750
Insurance expense – accrual basis - 147,000
Insurance expense – cash basis 152,250
+ Prepaid insurance - beg 45,500
- Prepaid insurance – end 50,750
Insurance expense – accrual basis 147,000

15. B
Utilities – cash basis - 220,500
+ Accrued utilities – end - 36,000
- Accrued utilities – beg - 24,750
Utilities – accrual basis - 231,750
Utilities – cash basis 220,500
+ Accrued utilities – end 36,000
- Accrued utilities – beg 24,750
Utilities – accrual basis 231,750

16. A – given in item # 2

17. B – refer to Question # 5 question
18. A
Beginning inventory 1,085,000
Purchases 5,575,500
Ending inventory (1,274,000)
Cost of Sales 5,386,500

19. C
Since there is a comprehensive insurance policy for the damage, only P500,000 will be charged as
loss (3M –
2.5M)
PAS 37, paragraph 14, provides that a provision shall be recognized as a liability in the financial
statements under the following conditions:
a. The entity has a present obligation, legal or constructive, as a result of a past event.
b. It is probable that an outflow of resources embodying economic benefits would be required
to settle the obligation.
c. The amount of the obligation can be measured reliably.
The amount recognized as a provision should be the best estimate of the expenditure required to
settle the present obligation at the end of reporting period. In this problem, however, since there
is a comprehensive insurance policy for the damage only P500,000 (3,000,000 – 2,500,000) will
be charged as loss instead of P3,000,000.