CORDILLERA CAREER DEVELOPMENT COLLEGE

College of Accountancy
Buyagan, Poblacion, La Trinidad, Benguet

Audit 3
Midterm Exam
Problem 1. N.B. Prob. 1 , 2 & 3 ( Midterm Exam)
The following situations are found in the records of the KILI KILI NI JARO, INC. in your audit of
the company’s financial statements for the year ended December 31, 2021.
1. December 1, 2021:
Advertising expense 72,000
Cash 72,000
Payment of 2022 advertising contract.

2. Balance of Office supplies expense, Dec. 31, 2021 P45,000

Balance of unused office supplies, Dec. 31, 2021 P15,000
Inventory of office supplies, Dec. 31, 2021 P 22,500

3. June 2, 2021
Prepaid insurance 54,000
Cash 54,000
Payment of one-year insurance premium for inventory.

4. Balance of factory supplies expense account, Dec. 31, 2021 P69,000

Physical inventory of factory supplies, Dec. 31, 2021 58,500

5. On May 1, 2021, a two-year subscription to the industry journal in the amount of P14,400 was
paid. Subscription expense was charged for the entire amount.

Prepare the adjusting journal entries on December 31, 2021, based on the situations described. ( 3 points each)

Problem 2.

During the coming next year, Magma , Inc. issued 8,000,000 of 7-year, 9% bonds on January 2. The
bonds pay interest semiannually on June 30 and December 31. The current market rate
of interest is 8%.

Required:
1. Calculate the selling price of the bonds, rounded to the nearest peso. ( 3 points)

2. Journalize the entry to issue the bonds at that price. ( 3 points)

3. Journalize the entry to pay interest and to amortize the discount or premium on
June 30. (3 points)

Problem 3.
To substantiate the existence of the accounts receivable balances as at December 31, 2020 of DOMDALE COMPANY, you
have decided to send confirmation requests to customers.  Below is a summary of the confirmation replies together with
the exceptions and audit findings.  Gross profit on sales is 20%.  The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia   P150,000 P90,000 was returned on December 30, Returned goods were
2020.  Correct balance as is P60,000. received December 31, 2020.
Falcon    P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2020 cancels this. Domdale Company in 2021.
Lazaro   P144,000 You have overpriced us by P150.  Correct The complaint is valid.
price should be P300.
Silang   P112,500 We received the goods only on January 6, Term is shipping
2021. point.  Shipped in 2020.
Yakal   P135,000 Balance was offset by our December Domdale Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases.  Yakal is a
supplier.
1.  If the necessary adjusting journal entry is made regarding the case of Concordia, the net income will (3 pts.)

       A.  Decrease by P18,000.                 C.  Increase by P18,000.

       B.  Decrease by P90,000.                 D.  Increase by P90,000.

2.  The effect on 2020 net income of Domdale Company of its failure to record the CM involving transaction with Falcon.( 3
pts.)

       A.  P30,000 over.                           C.  P6,000 over.

       B.  P30,000 under.                          D.  P6,000 under.

3.  The overstatement of receivable from Lazaro is (3 pts.)

       A.  P96,000                B.  P24,000                C.  P72,000                D.  P48,000

4.  The accounts receivable from Silang is (3 pts)

       A.  Correctly stated.                        C.  P112,500 under.

       B.  P112,500 over.                          D.  P225,000 under.

5.  The adjusting entry to correct the receivable from Yakal is (3 pts)

       A.  Purchases                                                                      135,000
                 Accounts receivable                                                                     135,000
       B.  Accounts payable                                                            135,000
                 Purchases                                                                                  135,000
       C.  Accounts receivable                                                         135,000
                 Accounts payable                                                                        135,000
       D.  Accounts payable                                                            135,000
                 Accounts receivable                                                                     135,000

Problem 4. ( For Class Standing)

You are the auditor of the Dana Company, a new client, at the close of its fiscal year on April 30, 2021.

Shown below are the shareholders’ equity accounts in the general ledger:
Ordinary Share Capital
09/14/2 CD 110,000 05/01/20 CR 1,200,000
0
04/28/21 J 109,000

Retained Earnings
04/28/21 J 109,000 02/02/21 CR 52,500
04/30/21 J 800,000

Income Summary
04/30/2 J 5,200,000 04/30/21 J 6,000,000
1
04/30/2 J 800,000
1

Additional information
a) From the articles of incorporation
Authorized share capital 30,000 shares
Par value per share P100
b) Directors’ minutes include the following resolutions:
04/30/20 authorized the issue of 10,000 shares at P120 per share
09/13/20 Authorized the acquisition of 1,000 shares at P110
02/01/21 Authorized the reissue of 500 treasury shares at P105
04/28/21 Declared a 10% stock dividend, payable May 31, 2021, to shareholders of record as of April ,
30, 2021. The market value of the Dana Company stock on April 28, 2021, was P130 per
share.

Based on the above information, determine the correct balances of the following accounts on April 30, 2021.
1. Ordinary share Capital ( 6 points)
A. P1,199,000 C. P1,100,000
 B. P1,000,000 D. P900,000

2. Treasury Shares ( 6 points)

A. P110,000 C. P50,000
B. P100,000 D. P55,000

3. Share Premium (6 points)

A. P226,000 C. P228,500
B. P231,000 D. P200,000

4. Retained Earnings ( 6 points)

A. P619,000 C. P676,500
B. P800,000 D. P797,500

5. Stock Dividends Payable ( 6 points)

A. P123,500 C. P109,000
B. P95,000 D. P0

/dbay-an