ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Quizzer

AUDITING (Auditing Problems) S. Ireneo Ÿ C. Espenilla

AP-100Q: QUIZZER ON ACCOUNTING CHANGES, ERROR CORRECTIONS,

CASH/ACCRUAL and SINGLE ENTRY

PROBLEM 1:

Bee Co.’s net income for 2016, 2017 and 2018 were P100,000, P145,000 and P185,000; respectively.
The following items were not handled properly.

a. Rent of P6,500 for 2019 was received from a lessee on December 23, 2018, and recorded as
outright income in 2018.

b. Salaries payable at the end of the following years were omitted:

December 31, 2015 2,500

December 31, 2016 5,500
December 31, 2017 7,500
December 31, 2018 4,700

c. The following unused office supplies were omitted in the accounting records:

December 31, 2015 3,500

December 31, 2016 6,500
December 31, 2017 3,700
December 31, 2018 7,100

d. On January 1, 2016, the company completed major repairs on the company’s machinery and
equipment totaling P220,000, which was expensed outright. The said equipment is 5 years old as
of January 1, 2016. As of December 31, 2018, the equipment had an original cost of P500,000
and a carrying value of P250,000.

1. The correct 2018 depreciation expense is:

a. 31,250 c. 51,250
b. 50,000 d. 70,000

2. The corrected 2016 net income is:

a. 80,000 c. 240,000
b. 234,000 d. 300,000

3. The corrected 2017 net income is:

a. 113,700 c. 126,700
b. 120,200 d. 139,300

4. The corrected 2018 net income is:

a. 184,700 c. 165,600
b. 170,900 d. 164,700

5. The effect of the above errors on the 2018 beginning retained earnings is:
a. 176,200 understatement c. 116,200 understatement
b. 136,200 understatement d. 3,800 overstatement

6. The effect of the above errors on 2018 working capital is:

a. 4,100 understatement c. 8,900 understatement
b. 4,100 overstatement d. 8,900 overstatement

PROBLEM 2:

The following information pertains to Lot Inc.’s depreciable assets:

a. Equipment XYZ was acquired on January 2015 by exchanging an old delivery van originally
costing P225,000 but with a carrying value on the same date at P75,000. The new equipment
had cash purchase price of P450,000 while the old equipment had a market value of P50,000.
The company paid P400,000 on the trade in, which the company had debited to the Equipment
account, the only entry made by the client related to the trade in transaction. The equipment
had been depreciated over its 10 year useful life using the straight-line method. On January 3,
2018, it had been ascertained that the equipment had a 5 year remaining useful life.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-100Q
Quizzer: ACCOUNTING CHANGES, ERROR CORRECTIONS, CASH/ACCRUAL and SINGLE ENTRY

b. Equipment UVW cost P393,750 and was acquired on January 1, 2016. On the date of
acquisition, the expected useful life was 12 years with no residual value. The straight line
depreciation method was used. On January 2, 2018, it was estimated that the remaining life
of the asset would be 6 years and that there would be an P18,750 residual value. In addition,
150% declining balance method will be used to fairly reflect the mode of use of the asset.

c. A building was purchased on January 3, 2015, for P4,500,000. The building was expected to
have a useful life of 20 years with no residual value. The straight-line depreciation method
was used. On January 1, 2018, a change was made to the sum-of-years’ digits method of
depreciation. Total life of the asset was estimated to be at 15 years with P50,000 residual
value.

Requirements:

1. How much is the adjustment to the accumulated depreciation account and the related depreciation
expense for the current year for the Equipment XYZ?
a. 15,000 and 63,000; c. 165,000 and 56,000
b. 135,000 and 63,000 d. 135,000 and 56,000

2. How much is the depreciation expense for the current year for the Equipment UVW?
a. 82,031 b. 77,344 c. 82,813 d. 87,500

3. What is the book value of the building at December 31, 2018?

a. 3,346,875 b. 3,570,000 c. 3,236,538 d. 3,244,231

PROBLEM 3:

You were engaged by Kuting Corp. to audit its financial statements for the first time. In examining the
company’s books, you discovered that certain adjustments had been overlooked at the end of 2017
and 2018. Moreover, you also discovered that other items had been erroneously recorded. The said
omissions and other failures for each year are noted below:

2017 2018
Prepaid insurance 256,000 205,200
Accrued salaries and wages 582,400 520,000
Accrued interest income 172,800 142,000
Advances from customers 313,600 374,000
Capital expenditures charged as repairs expense 376,000 348,000

Audit notes:
a. Collections from customers had been recorded as sales but should have been recognized as
advances from customers because goods were not shipped until the following year.

b. Capital expenditures had been recorded as repairs but should have been charged to the
Machinery account; the depreciation rate is 10% per year, but depreciation in the year of
expenditures is to be recognized at 5%.

Based on the above and the result of your audit, answer the following:

1. What is the total effect of the errors on the 2018 net income?
a. Understated by 251,000 c. Understated by 213,400
b. Overstated by 216,200 d. Overstated by 253,800

2. What is the total effect of the errors on the company’s working capital as of December 31, 2018?
a. Understated by 202,200 c. Understated by 177,200
b. Overstated by 79,600 d. Overstated by 546,800

3. If remained unadjusted, what will be the effect of the errors to the company’s December 31, 2018
accumulated profits?
a. Understated by 477,400 c. Understated by 177,200
b. Overstated by 620,600 d. Overstated by 570,600

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PROBLEM 4:

The income statement of GHI Inc. showed the following net income:
2017 P1,750,000
2018 2,000,000

An examination of the accounting records for the year ended December 31, 2018 revealed that several
errors were made. The following errors were discovered:

a. Salary accrued at year-end were consistently omitted:

2017 P100,000
2018 140,000

b. The footings and extensions showed that the inventory on December 31, 2017 was overstated
by P190,000.

c. Prepaid insurance of P120,000 applicable to 2019 was expensed in 2018.

d. Interest receivable of P20,000 was not recorded on December 31, 2018.

e. On December 26, 2018 an equipment costing P400,000 was sold for P220,000. At the date of
sale, the equipment had an accumulated depreciation of P240,000. The cash received was
recorded as miscellaneous income in 2018.

f. A building which had a fair value of P1,200,000 was accepted from the city government as a
donation on January 1, 2017. The building that was estimated to be useful for another 10
years was to be used as a factory site as a condition on the grant. Legal fees incurred in
relation to the donation was at P100,000 and was charged to 2017 operating expenses.
Another P200,000 was incurred to remodel and renovate the building prior to use. The
building was capitalized at P200,000 (renovation cost) and was depreciation over remaining
life using straight line.

Requirements:
1. What is the correct net income in 2017?
a. 1,550,000 c. 1,490,000
b. 1,520,000 d. 1,430,000

2. What is the correct net income in 2018?

a. 2,120,000 c. 1,990,000
b. 2,000,000 d. 1,950,000

3. What is retroactive adjustment to the 2018 beginning retained earnings?

a. 80,000 c. (200,000)
b. (160,000) d. 320,000

4. What is the correct carrying value of the building as of December 31, 2018?
a. 240,000 c. 1,120,000
b. 960,000 d. 1,200,000

PROBLEM 5:

The income statements of Roxas Inc. indicate the following net income:
2016 P1,500,000
2017 1,750,000
2018 2,000,000

An examination of the accountin g records for the year ended December 31, 2018 indicates that
several errors were made. The following errors were discovered:

a. Salary accruals on December 31, were consistently omitted:

2015 P95,000
2016 110,000
2017 100,000
2018 140,000

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a. The footings and extensions showed that the inventory on December 31, 2017 was overstated
by P190,000.

b. P150,000 worth of inventories were received on January 4, 2019. Upon investigation you
discovered that these goods were shipped by the supplier on December 30, 2018 FOB Shipping
point. Further investigation revealed that liability on the item were recorded when the goods
were received.

c. Prepaid insurance were consistently omitted at the end of each year:

2015 P75,000
2016 100,000
2017 115,000
2018 120,000

a. Interest receivable were not recorded on December 31 of the following years:

2016 P20,000
2017 25,000
2018 30,000

a. On January 1, 2018 an equipment costing P400,000 was sold for P220,000. At the date of sale
the equipment had accumulated depreciation of P240,000. The cash received was recorded by
the company as miscellaneous income.

b. You also discovered that on July 1, 2016, the company completed the construction of the left
wing of its factory building incurring a total cost of P750,000, which it had charged to repairs
expense. The said building has been used in operations for 5 years as of July 1, 2016 and its
life was unaffected by the extension. The building which had an original cost of P3,000,000
had an accumulated depreciation of P1,125,000 as of December 31, 2018.

Required:

1. What is the correct depreciation expense in 2018?

a. 150,000 c. 200,000
b. 175,000 d. 187,500

2. What is the correct net income in 2016?

a. 2,365,000 c. 2,255,000
b. 2,235,000 d. 2,230,000

3. What is the correct net income in 2017?

a. 1,540,000 c. 1,640,000
b. 1,590,000 d. 1,690,000

4. What is the correct net income in 2018?

a. 2,100,000 c. 2,050,000
b. 2,000,000 d. 1,950,000

PROBLEM 6:

You are auditing the financial statements of WWEE Company. The company’s accountant provided you
with the following comparative statements of income and accumulated profits for the years 2018 and
2017:
2018 2017
Sales 6,000,000 4,500,000
Cost of goods sold (2,800,000) (2,400,000)
Gross income 3,200,000 2,100,000
Operating expenses (1,500,000) (1,800,000)
Net profit 1,700,000 300,000

Accumulated profits, beg 1,150,000 1,000,000

Net profit 1,700,000 300,000
Dividends paid (500,000) (150,000)
Accumulated profits, end 2,350,000 1,150,000

Audit notes:

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a. The management, with your concurrence, opined that changing the company’s inventory
costing from FIFO to Weighted Average is justified as it will present a more relevant and
reliable financial information given the prevailing current circumstance. The following
summarizes the inventory costs at year end under both methods:
2018 2017
FIFO 625,000 727,500
Weighted Average 715,000 827,500

The said change has not been implemented by the accountant as of the audit period.

b. The company decided to change its method of depreciation from the double declining balance
method to the straight line. The depreciable assets had a 10 year useful life and has been
depreciated for five years at the end of 2017. The salvage value of the said assets was
estimated to be P50,000. Expenses in the income statements included P350,000 and
P437,500 depreciation expenses in 2018 and 2017, respectively, computed based on double
declining balance method.

c. On August 31, 2017, the company started the construction of a building it plans to use as a
second factory. As of the current balance sheet date, the construction is yet to be done. Total
accumulated costs incurred on the construction and recorded in its Construction-in-progress
account, amounted to P1,250,000, which excluded a P25,000 borrowing cost in 2017 which
has been charged to expense. You have ascertained that such borrowing cost should have
been capitalized following the PAS 23. Actual borrowing cost in 2018 amounted to P75,000
which have been charged to expense.

Answer the following questions based on the above information:

1. What is the restated net income in 2017 to be presented in the comparative income statements?
a. 425,000 b. 400,000 c. 300,000 d. 275,000

2. What is the correct net income in 2018?

a. 1,700,000 b. 1,685,000 c. 1,775,000 d. 1,610,000

3. What is the adjusted accumulated profits balance at the beginning of 2018?

a. 1,025,000 b. 1,075,000 c. 1,225,000 d. 1,275,000

4. What is the adjusted accumulated profits at the end of 2018?

a. 2,425,000 b. 2,385,000 c. 2,550,000 d. 2,885,000

5. What is the necessary adjusting entry a result of the change described in item c?
a. No adjustment necessary

b. Interest expense 25,000

Retained earnings 25,000

c. Building 100,000
Retained earnings 25,000
Interest expense 75,000

d. Building 100,000
Interest expense 100,000

PROBLEM 7:

Kris Company presented to you the following income statement in line with the same company’s audit
of the financial statements:

KRIS COMPANY
INCOME STATEMENT
For the Year Ended December 31, 2018

Sales P10,350,000
Cost of Goods Sold 7,050,000
Gross profit P3,300,000
Operating expenses:
Selling P675,000
Administrative 1,050,000 1,725,000
Net income P1,575,000

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Your audit disclosed the following information:

• Accounts receivable decreased P540,000 during the year.

• Prepaid expenses increased P255,000 during the year.

• Accounts payable to suppliers of merchandise decreased P412,500 during the year.

• Accrued expenses payable decreased P150,000 during the year.

• Administrative expenses include depreciation expense of P90,000.

• Inventories decreased by P450,000.

Requirements:

1. What is the total amount of cash received form customers during the year?
a. 10,890,000 c. 9,810,000
b. 10,350,000 d. 10,477,500

2. What is the total amount of cash paid to suppliers during the year?
a. 6,600,000 c. 7,012,500
b. 7,912,500 d. 6,187,500

3. What is the total amount of cash paid for operating expenses during the year?
a. 1,740,000 c. 2,130,000
b. 1,530,000 d. 2,040,000

4. What is the net amount of cash provided by operating activities?

a. 1,492,500 c. 1,747,500
b. 1,837,500 d. 1,575,000

PROBLEM 8:

You are auditing the financial statements of UKG INC. for the year ended December 31, 2018. The
company maintains its books on a semi-accrual and semi-cash basis. Purchases and sales are
recognized on an accrual basis while other operating expenses are kept on cash basis. The company
bookkeeper presented to you a draft of its income statements for the year under audit:

Sales P600,000
Cost of sales 360,000
Gross profit P240,000
Depreciation expense (29,000)
Other expenses (166,000)
Interest expense (20,000)
Net income P25,000

Your investigation revealed the following information:

a. On January 1, 2018, UKG issued P200,000, 10%, 10 year bonds when the market rate of
interest was 8%. Interest is payable on June 30 and December 31.

b. All purchases of inventory are on account and other expenses reflect those expenses paid in
cash during the period.

c. The company had open invoice (unpaid invoices) from suppliers amounting to P120,000 on
December 31, 2018 and P116,000 on January 1, 2018.

d. The company had outstanding invoices (uncollected invoices) to customers amounting to

P96,000 on January 1, 2018 and P110,000 on December 31, 2018.

e. Inventory taking at the end of each year revealed that inventory on hand on December 31,
2003 amounted to 186,000 while inventory on December 31, 2018 was at P174,000.

f. Accrued utilities at the beginning and at the end of the year amounted to P5,000 and 7,000,
respectively while prepaid rentals at the beginning and at the end of the year amounted to
P10,000 and 14,000, respectively.

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Based on the information available and as a result of your audit, determine the following:

1. How much was paid for inventory purchases?

a. 344,000 b. 348,000 c. 368,000 d. 372,000

2. How much was received from customers in 2018?

a. 490,000 b. 566,000 c. 586,000 d. 614,000

3. What is the carrying value of the bonds payable on December 31, 2018?
a. 225,318 b. 226,267 c. 226,840 d. 227,180

4. What is the correct interest expense in 2018?

a. 21,862 b. 20,000 c. 19,087 d. 18,138

5. What is the correct net income in 2018?

a. 26,862 b. 28,862 c. 29,718 d. 46,000

PROBLEM 9:

You were able to gather the following in connection with our audit of the Wowie Corp. for the year
ended December 31, 2018:
December 31, 2017 December 31, 2018
Accounts receivable P6,400,000 P4,000,000
Unpaid merchandise invoices ? 2,621,000
Accrued wages 85,000 125,000
Advertising supplies inventory 35,000 75,000
Accrued advertising expense 14,250 40,000
Prepaid insurance 25,000 0
Unexpired insurance 0 41,000

During the year:

• Amount collected from customers, P10,000,000
• Total payments to suppliers of merchandise, P13,618,000
• Total payments to suppliers of merchandise of prior years, P4,632,000
• Wages paid, P3,050,000
• Advertising paid which includes, P300,000
• Insurance premium paid, P125,000

Requirements:

1. Total sales for 2018 under accrual basis

a. 6,400,000 b. 12,400,000 c. 7,600,000 d. 14,000,000

2. Total purchases for 2018 under accrual basis

a. 11,607,000 b. 15,629,000 c. 13,618,000 d. 16,239,000

3. Accrual wages expense for 2018

a. 3,010,000 b. 3,090,000 c. 3,100,000 d. 3,140,000

4. Accrual advertising expense in 2018

a. 245,750 b. 285,750 c. 260,000 d. 300,000

5. Accrual insurance expense in 2018

a. 84,000 b. 109,000 c. 100,000 d. 141,000

PROBLEM 10:

An analysis of incomplete records of Journey Corporation produced the following information applicable
to 2018:

ACCOUNT INCREASES
Cash 4,200,000
Accounts receivable 1,400,000
Accounts payable 400,000
Prepaid insurance 200,000

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ACCOUNT DECREASES
Inventory 1,000,000
Equipment 100,000
Notes receivable 600,000
Accrued salaries payable 300,000

Summary of cash transactions were as follows:

RECEIPTS:
Cash sales 3,000,000
Collections on accounts receivable 30,000,000
Collections on notes receivable 2,400,000
Interest on notes receivable 200,000
Purchase returns and allowances 500,000

DISBURSEMENTS:
Cash purchases 1,000,000
Payments on accounts payable 16,500,000
Sales returns and allowances 400,000
Insurance 700,000
Salaries 10,000,000
Equipment 800,000
Other expenses 1,500,000
Dividends 1,000,000

Additional information:
a. Total purchase returns and allowances amounted to P800,000

b. Total sales returns and allowances amounted to P1,200,000.

Required: Determine the audited balances of the following:

1. Net sales
a. 35,800,000 c. 36,600,000
b. 36,200,000 d. 37,000,000

2. Net purchases
a. 17,900,000 c. 17,400,000
b. 17,700,000 d. 17,000,000

3. Cost of sales
a. 18,000,000 c. 18,700,000
b. 18,400,000 d. 18,900,000

4. Depreciation expense
a. 100,000 c. 900,000
b. 800,000 d. 1,000,000

5. Net income
a. 5,000,000 c. 5,200,000
b. 5,150,000 d. 5,900,000

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