Nfjpia Cup - Auditing Problems SGV & Co. Easy Question #1: Answer: P126,816

NFJPIA CUP – AUDITING PROBLEMS SGV & Co.
EASY QUESTION #1
On January 2, 2014, the Dragonite, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will mature on
January 1, 2018 and interest is payable annually every January 1. The bond contract entitles the bondholders to receive 6
shares of P100 par value common stock in exchange for each P1,000 bond. On the date of issue, the prevailing market
interest rate for similar debt without the conversion option is 10%.
On December 31, 2015, the holders of the bonds with total face value of P1,000,000 exercised their conversion privilege.
In addition, the company reacquired at 110, bonds with a face value of P500,000.
Market value of the common stock and bonds were as follows:
Date Bonds Common stock

December 31, 2014 118 40
December 31, 2015 110 42
How much of the proceeds from the issuance of convertible bonds should be allocated to equity?
Answer: P126,816
Total proceeds 2,000,000

Less liability component:
Present value of the principal (P2,000,000 x 0.6830) 1,366,000
Present value of the interest (P2,000,000 x 8% x 3.1699) 507,184 1,873,184
Equity component 126,816
Present Value Calculation:
PV of 1 = (1 + i)-n
= (1 + .10)-4
= 0.6830
PV of ordinary annuity = 1 – (1 + i)-n / i

= 1 – (1 + .10)-4 / .10
= 3.1699
NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #2
Dragonair Cereal Co. frequently distributes coupons to promote new products. On October 1, 2014, Dragonair mailed
1,000,000 coupons for P.45 off each box of cereal purchased. Dragonair expects 120,000 of these coupons to be redeemed
before the December 31, 2014 expiration date. It takes thirty days from the redemption date for Dragonair to receive the
coupons from the retailers. Dragonair reimburses the retailers an additional P.05 for each coupon redeemed. As of
December 31, 2014, Dragonair had paid retailers P25,000 related to these coupons and had 50,000 coupons on hand that
had not been processed for payment. What amount should Dragonair report as a liability for coupons in its December 31,
2014 balance sheet?
Answer: P35,000
Dragonair expects 120,000 coupons to be redeemed at a total cost of P.50 per coupon (P.45 + P.05). Therefore,
total expected redemptions are P60,000 (120,000 × P.50). By 12/31/14, P25,000 has been paid on coupon
redemptions, so a liability of P35,000 must be established (P60,000 − P25,000). Note that this liability would
include both payments due for the 50,000 coupons on hand, and payments due on coupons to be received within
the first thirty days after the expiration date.
Moltres Company prepares the following lease payment schedule for the lease of a machine from Zapdos Company. The
machine has an economic life of 6 years. The lease agreement requires four annual payments of P33,000 and the machine
will be returned to Zapdos Company at the end of the lease term.
Minimum lease Liability

payment Interest expense reduction Liability balance
July 1, 2014 98,512
July 1, 2015 30,000 9,851 20,149 78,363
July 1, 2016 30,000 7,836 22,164 56,199
July 1, 2017 30,000 5,620 24,380 31,819
July 1, 2018 30,000 3,181 31,819 -
The annual depreciation expense in relation to the leased asset is
Answer: P23,378
Lease liability (initial) P98,512

Less: Guaranteed residual value 5,000
93,512
Divided by: Lease term (shorter than EUL) 4
Annual depreciation of leased asset P23,378
Snorlax Company received a government grant related to depreciable assets five years ago on January 1, 2009 in the
amount of P1,000,000. This grant was deducted from the capital cost of the asset purchased at a total amount of
P6,000,000 on the same date with a useful life of 10 years and no residual value. On January 1, 2014, the entire
P1,000,000 became repayable due to the lack of compliance with the conditions attached to the grant by the government.
What is the total amount to be recognized as expense in relation to the depreciation of the asset and the repayment of the
grant?
Answer: P1,100,000
Cumulative additional depreciation (1M / 10 x 5) 500,000
Carrying amount 1/1/14 (6,000,000 – 1,000,000 = 5,000,000 / 10 x 5) 2,500,000

Government grant repaid 1,000,000
Additional depreciation ( 500,000)
Adjusted carrying amount 3,000,000
Divide by remaining life 5
Depreciation expense 600,000
Total amount of expense (500,000 + 600,000) 1,100,000
PIDGEY Company’s December 31 year-end financial statements contained the following errors
December 31, 20XA December 31, 20XB

Ending inventory P91,000 overstated P61,000 understated
Accounts payable P54,000 understated P62,000 overstated
Depreciation expense P23,000 understated -
An insurance premium covering years 20XA, 20XB and 20XC amounting to P135,000 was prepaid and expensed in full
in 20XA. Increase in fair value on available for sale (AFS) securities amounting to P52,000 and P38,790 for 20XA and
20XB, respectively, were included in other comprehensive income. AFS securities are classified as non-current assets in
PIDGEY’s balance sheets. What is the under/overstatement of PIDGEY’s working capital as of December 31, 20XA due
to the errors?
Answer: Overstatement of P100,000
Under/(Over)statement of working capital as

of December 31, 20XA
Ending inventory (P91,000)
Insurance premium* 45,000
Accounts payable (54,000)
Overstatement (P100,000)
The physical inventory of Articuno Company as of December 26, 2014 totaled P1,975,000. In trying to establish the
December 31, 2014 inventory, the accountant noted the following transactions occurred from December 27 to December
31, 2014.
Sales (20% markup on cost) P600,000

Credit memos issued for goods returned on:
December 15 25,800
December 20 35,000
December 29 36,000
Credit memos received for goods returned on:
December 10 17,000
December 26 23,000
December 28 8,000
Purchases:
Placed in stock 120,000
In transit, FOB shipping point 50,000
In transit, FOB destination 33,000
The inventory as of December 31, 2014 is
Answer: P1,667,000
Inventory, December 26, 2014 (per count) P1,975,000

Cost of goods sold (P600,000 / 120%) ( 500,000)
Credit memo issued on December 29, 2014 (36,000 / 120%) 30,000
Credit memo received on December 28, 2014 ( 8,000)
Purchases placed in stock 120,000
In transit, FOB shipping point 50,000
Inventory, December 31, 2014 P1,667,000
On May 2, 2014, a fire destroyed the entire merchandise inventory on hand of Aerodactyl Corporation. The following
information is available:
Sales, Jan. 1 through May 2, 2014 P360,000

Inventory, Jan. 1, 2014 80,000
Merchandise purchases, January 1 through May 2, 2014 (including P40,000
of goods in transit on May 2, 2014 shipped FOB shipping point) 330,000
Mark-up percentage on cost 20%
What is the estimated inventory on May 2, 2014 immediately prior to the fire?
Answer: P110,000
Inventory prior to the fire:

Inventory, Jan. 1, 2014 P 80,000
Add: Purchases 330,000
Total available for sale 410,000
Less: Estimated cost of sales (360,000 / 120%) 300,000
Inventory, May 2, 2014 P110,000
The Kabutops Company was organized late in 2013 and began operations on January 1, 2014. Kabutops is engaged in
conducting market research studies on behalf of manufacturers. Prior to the start of operations, the following costs were
incurred:
Attorney’s fees in connection with organization of Kabutops P 4,000

Improvements to leased offices prior to occupancy 7,000
Meetings of incorporators, filing fees and other organization expenses 5,000
P16,000
What is the amount of organization costs that should be charged off in full as expense for 2014?
Answer: P9,000
Attorney’s fees in connection with organization of Kabutops P4,000

Meetings of incorporators, filing fees and other organization expenses 5,000
Total P9,000
JM Corp.’s pretax income in 2014 was P100,000. The temporary differences between amounts reported in the financial
statements and the tax return are as follows:
 Depreciation in the financial statements was P8,000 more than tax depreciation.
 The equity method of accounting resulted in financial statement income of P35,000. A P25,000 dividend
was received during the year, which is eligible for the 80% dividends received deduction.
JM’s effective income tax rate was 30% in 2014. In its 2014 income statement, JM should report a current provision for
income taxes of
Answer: P23,400
Pretax book income P100,000

Excess book depreciation 8,000
Excess book investment revenue [P35,000 – (20% x P25,000) ( 30,000)
Taxable income P 78,000
Omastar Company acquires new manufacturing equipment on January 1, 2015, on installment basis. The deferred
payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8
equal installment payments of P388,020, including 10% interest. The payments are to be made on December 31 of each
year, beginning December 31, 2015. The equipment has a cash price equivalent of P2,370,000. Omastar’s financial year-
end is December 31.
The amount to be recognized on January 1, 2015, as discount on note payable is
Answer: P1,034,160
Cost of equipment (cash price equivalent) P2,370,000

Less: Down payment 300,000
Amount assigned to note payable 2,070,000
Face value of note 3,104,160
Discount on the note payable, January 1, 2015 P1,034,160
NFJPIA CUP – AUDITING PROBLEM SGV & Co. AVERAGE QUESTION #1
Eevee Company incurred research and development costs in 2014 as follows:
Materials used in research and development projects P 400,000

Equipment acquired that will have alternative future uses in research and
development projects 2,000,000
Depreciation for 2014 on above equipment 500,000
Personal costs of persons involved in research and development projects 1,000,000
Consulting fees paid to outsiders for research and development projects 100,000
Indirect costs reasonably allocable to research and development projects 200,000
P4,200,000
The amount of research and development costs charged to Eevee Company’s 2014 income statement should be
Answer: P2,200,000
Total research and development cost, per client P4,200,000

Less: Cost of equipment acquired that will have alternative future uses in
research and development projects 2,000,000
Corrected research and development cost P2,200,000
NFJPIA CUP – AUDITING PROBLEM SGV & Co. AVERAGE QUESTION #2
Having been engaged as external auditor of Omanyte Company on February 28, 2015, you were unable to observe the
taking of the inventory on December 31, 2014, which was reported to amount to P360,000. The following data, however,
were gathered by you:
Inventory, Dec. 31, 2013 320,000

Purchases during 2014 1,410,000
Cash sales during 2014 350,000
Shipment received on December 26, 2014, included in physical
inventory, but not recorded as purchases 10,000
Deposits made with suppliers, entered as purchases; goods were not
received in 2014 20,000
Collections on accounts receivable, 2014 1,800,000
Accounts receivable, January 1, 2014 250,000
Accounts receivable, December 31, 2014 300,000
Gross profit percentage on sales 40%
The estimated inventory shortage at December 31, 2014 was
Answer: P40,000
Inventory, Dec. 31, 2013 P 320,000

Add: Purchases (1,410,000 + 10,000) P1,420,000
Less: Deposits made with suppliers 20,000 1,400,000
Total available for sale 1,720,000
Less: Cost of sales
Cash sales P 350,000
Credit sales* 1,850,000
Total sales 2,200,000
Cost rate x 60% 1,320,000
Inventory, 12/31/14, per audit P 400,000
Inventory, 12/31/14, per client 360,000
Inventory shortage P 40,000
NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #3
The Machinery account of Porygon Company contains the following entries during the year:
Date Item Dr. Cr.

2014
Jan. 1 Balance P 600,000
June 30 Purchased four new machines 360,000
Installation cost of new machines 16,000
Sept. 30 Proceeds from sale of old machine, cost P50,000,
accumulated depreciation P35,000 P 22,000
Oct. 31 Repairs of machinery 25,000
Dec. 1 Cash paid for trade-in of old machines, cost P30,000,
accumulated depreciation P12,000. Cash price of new
machine, P90,000 75,000
Dec. 31 Balance - 1,054,000
Total P1,076,000 P1,076,000
Assuming depreciation is recorded on monthly basis at 10% a year, how much was the depreciation charge for 2014?
Answer: P78,050
Date Covered Computation Amount

1-1-14 to 6-30-14 P600,000 x 10% x 6/12 P30,000
7-1-14 to 9-30-14 976,0001 x 10% x 3/12 24,400
10-1-14 to 12-01-14 926,000 2x 10% x 2/12 15,430
12-01-14 to 12-31-14 986,000 x3 10% x 1/12 8,220
Total P78,050
1
600,000 + 360,000 + 16,000
2
976,000 – 50,000
3
926,000 + (90,000 – 30,000)
On October 1, 2013 Lion King Company acquired a biological asset and paid P450,000. The fair value less cost to sell of
the biological asset at the time of acquisition was P445,000. On December 31, 2013 the fair value less cost to sell of the
biological asset was P475,000.
On July 1, 2014 Lion King Company harvested the biological asset and eventually reclassified it as inventory. The fair
value less cost to sell at point of harvest was P485,000. As of December 31, 2013 the harvested biological asset was still
on hand. The fair value less cost to sell of a biological asset similar to the one harvested in July 1, 2014 was P481,000.
The net realizable value of the harvested biological asset was P480,000.
The amount of the biological asset reported in the December 31, 2013 statement of financial position is
Answer: P475,000
The subsequent measurement of biological asset is its fair value less cost to sell P475,000.
On January 1, 2014, Flareon Company established significant influence over Jolteon Company by acquiring 60,000
ordinary shares, a 30% interest, for P570,000. The book value of Jolteon was P1,300,000 on January 1, 2014. Since this
purchase Jolteon earned income and paid dividends as follows:
Year Net income Dividends

2014 P180,000 P100,000
2015 310,000 140,000
The market value per share on Jolteon ordinary shares on December 31, 2014 and 2015 was P8 and P9.50, respectively.
The Flareon Company accounted for this investment at cost.
The effect on 2014 net income as a result of incorrectly applying accounting principles is net
overstatement/understatement of
Answer: Net understatement of P24,000
Dividend revenue recognized under fair value method (100,000 x 30%) P30,000
Equity in investee income (180,000 x 30%) 54,000
Net income understatement P24,000
The summary of the inventory count of Vaporeon Company as of December 31, 2014 is presented below:
Quantity Cost Market Amount

A 360 units P3.60/doz. P3.64/doz. P1,310.40
B 24 units 4.70 each 4.80 each 112.80
C 28 units 16.50 each 16.50 each 1,353.00
D 43 units 5.15 each 5.20 each 176.80
E 400 units 9.10 each 8.10 each 3,640.00
F 70 dozens 2.00 each 2.00 each 140.00
G 95 grosses 144/gross 132.00/gross 13,780.00
Based on your working papers, the proper value of the inventory as of December 31, 2014 is
Answer: P18,364.25
Per audit
Unit price Amount
Items Quantity (LCM) Amount Per client
A 360 units P3.60/doz. P108.00 P1,310.40
B 24 units 4.70 each 112.80 112.80
C 28 units 16.50 each 462.00 1,353.00
D 43 units 5.15 each 221.45 176.80
E 400 units 8.10 each 3,240.00 3,640.00
F 70 dozens 2.00 each 1,680.00 140.00
G 95 grosses 132/gross 12,540.00 13,780.00
TOTAL P18,364.25 P20,513.00
The retained earnings account of Ditto Company follows:
Date Item Dr. Cr.

7-1-13 Balance P48,500
3-31-13 Dividends paid P20,000
12-31-13 Net income for the year 32,400
4-1-14 Premium on ordinary shares 15,000
6-30-14 Gain on sale of treasury shares 10,000
9-30-14 Dividends declared 30,000
12-31-14 Net income for the year 45,100
Appraisal increase of land 30,000
Balance 131,000 -
P181,000 P181,000
The corrected balance of retained earnings as at December 31, 2014 should be
Answer: P76,000
Retained earnings before adjustments P131,000

Add (deduct) adjustments:
Premium on ordinary shares ( 15,000)
Gain on sale of treasury shares ( 10,000)
Appraisal increase of land ( 30,000)
Total adjustments P( 50,000)
Retained earnings after adjustments P 76,000
Tauros Company has been paying regular quarterly dividends of P1.50 and wants to pay the same amount in the third
quarter of 2014. The following information relates to the company’s equity:
Jan. 1 Shares outstanding, 400,000; P2 par (750,000 shares authorized).

Feb. 15 Issued 25,000 new shares at P10.50.
Mar. 31 Paid quarterly dividends of P1.50 per share
May 12 Converted P1,000,000 of P1,000 bonds to ordinary shares at the rate of 50 shares per
P1,000 bond.
June 15 Issued an 11% share dividend.
30 Paid quarterly dividends of P1.50 per share.
What is the total amount of dividends to be distributed during the year assuming no equity transactions occur after June
30?
Answer: P3,010,125
1st quarter (400,000 + 25,000 = 425,000 x P1.50) P 637,500

2nd – 4th quarter (790,875* x 3) 2,372,625
Total dividends to be distributed P3,010,125
Jan. 1 Shares outstanding 400,000

Feb. 15 Issuance 25,000
May 12 Bond conversion (50 x 1,000) 50,000
June 15 Stock dividend (475,000 x 11%) 52,250
30 Shares outstanding 527,250
Dividend rate x P1.50
Dividends to be paid P790,875*
Magmar Co. reported pretax incomes of P505,000 and P387,000 for the years ended December 31, 2013 and 2014,
respectively. However, the auditor noted that the following errors had been made:
a. Sales for 2013 included amounts of P191,000 which had been received in cash during 2013, but for which the
related goods were shipped in 2014. Title did not pass to the buyer until 2014.
b. The inventory on December 31, 2013, was understated by P43,200.
c. The company’s accountant, in recording interest expense for both 2013 and 2014 on bods payable, made the
following entry on an annual basis:
Dr.: Interest expense 75,000
Cr.: Cash 75,000
The bonds payable have a face value of P1,250,000 and pay a nominal interest rate of 6%. They were issued
at a discount of P75,000 on January 1, 2013, to yield an effective interest rate of 7%.
d. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2013 and 2014.
Repairs of P42,500 and P47,000 had been incurred in 2013 and 2014, respectively. In determining
depreciation charges, Magmar applies a rate of 10% to the balance in the Equipment account at the end of the
year.
What is the corrected pretax income for 2014?
Answer: P488,992
2014
Pretax income P387,000
Sales revenue erroneously recognized in 2013 191,000
Understatement of 2013 ending inventory ( 43,200)
Understatement of bond interest expense1 ( 7,758)
Ordinary repairs erroneously capitalized ( 47,000)
Overstatement of depreciation2 8,950
Corrected pretax income P488,992
The accounts receivable-trade showed an unadjusted debit balance of P500,000 on the December 31, 2014 trial balance.
Analysis of accounts receivable reveals that with two exceptions, all appeared collectible at December 31, 2014. The two
exceptions are:
a. The Graveler Company had fallen into receivership and was expected to realize only P.40 on the peso.
The December 31, 2013 net realizable value was P50,000. On February 14, 2014 P40,000 was recovered
from Graveler Company, while the rest was deemed uncollectible.
b. The Poliwag Association had not paid anything on their balance of P30,000 and his account was written
off since Mr. Pol, the president of this Association, had informed your client in December 2013 that it
appeared impossible that current obligations could ever be met and that mortgage holders would probably
absorb all asset proceeds in the event of liquidation. However, on March 2, 2014, P15,000 was received
from the association as final settlement.
At what net realizable value should the trade accounts receivable appear on the 2014 balance sheet?
Answer: P475,000
Accounts receivable per trial balance P500,000

Less: Loss on Graveler account (P50,000 – P40,000) 10,000
Balance 490,000
Add: Recovery on Poliwag account which was previously written off 15,000
Net realizable value P475,000
NFJPIA CUP – AUDITING PROBLEMS SGV & Co. DIFFICULT QUESTION #1
Electabuzz Company started construction of its administration building at an estimated cost of P50,000,0000 on January
1, 2015. The construction is expected to be completed by December 31, 2017. Electabuzz has the following debt
obligations outstanding during 2015:
Construction loan – 12% interest, payable semiannually,

issued December 31, 2014 P20,000,000
Short-term loan – 10% interest, payable monthly, and principal

payable at maturity on May 31, 2016 14,000,000
Long term loan – 11% interest, payable on January 1 of each

year. Principal payable on January 1, 2019 10,000,000
Assume that the weighted average of the accumulated expenditures during 2015 was P36,000,000.
What amount of interest incurred in 2015 would be included in the cost of the building being constructed?
Answer: P4,067,200
CAPITALIZATION RATE:
Interest Principal
Short-term loan P1,400,000 P14,000,000
Long-term loan 1,100,000 10,000,000
Total P2,500,000 P24,000,000
Capitalization rate (P2,500,000 / P24,000,000) = 10.42%
AVOIDABLE INTEREST:
Construction loan – specific borrowing (20,000,000 x 12%) P2,400,000

General borrowings:
Weighted-average accumulated expenditures P36,000,000
Less: Amount related to construction loan 20,000,000
Amount related to general borrowings 16,000,000
Capitalization rate x 10.42% 1,667,200
Total P4,067,200
ACTUAL INTEREST:
Construction loan (P20,000,000 x 12%) P2,400,000

Short term loan (P14,000,000 x 10%) 1,400,000
Long term loan (P10,000,000 x 11%) 1,100,000
Total P4,900,000
The amount of interest to be capitalized is the avoidable interest of P4,067,200 because it is lower than the actual
interest of P4,900,000. Under PAS 3: Borrowing Costs, the amount of borrowing costs capitalized during a period
should not exceed the amount of borrowing costs incurred during that period.
The bank statement of for the current account of Kangaskhan Co. showed a December 31, 2014, balance of P585,284.
Information that might be useful in preparing a bank reconciliation is as follows:
a. Outstanding checks were P52,810.

b. The December 31, 2014, cash receipts of P23,000 were not deposited in the bank until January 2, 2015.
c. One check written in payment of rent P8,940 was correctly recorded by the bank but was recorded by
Kangaskhan Co. as a P9,840 disbursement.
d. In accordance with prior authorization, the bank withdrew P18,000 directly from the current account as
payment on a mortgage note payable. The interest portion of that payment was P14,000. Kangaskhan Co. has
made no entry to record the automatic payment.
e. Bank service charges of P740 were listed on the bank statement.
f. A deposit of P35,000 was recorded by the bank on December 12, but it did not belong to Kangaskhan Co.
g. The bank statement included a charge of P3,400 for a not-sufficient-fund check. The company will seek
payment from the customer.
h. Kangaskhan Co. maintains an P8,000 petty cash fund that was appropriately reimbursed at the end of
December.
i. According to instructions from Kangaskhan Co. on December 30, the bank withdrew P40,000 from the
account and purchased Treasury bills for Kangaskhan Co. The company recorded the transaction in its books
on December 31 when it received notice from the bank. Half of the treasury bills mature in three months and
the other half in six months.
What is the cash in bank balance per books on December 31, 2014?
Answer: P541,714
Balance per bank statement P585,284

Outstanding checks ( 52,810)
Undeposited collections 23,000
Error in recording rent check (9,840 – 8,940) ( 900)
Automatic mortgage payment 18,000
Bank service charges 740
Bank-error – deposits incorrectly credited to Kangaskhan Co. ( 35,000)
NSF check 3,400
Balance per books P 541,714
The retained earnings account for Jynx Co. shows the following (debits) and credits:
Jan. 1 Balance P2,917,000

(a) Loss from fire ( 3,175)
(b) Goodwill impairment ( 322,000)
(c) Stock dividend ( 500,000)
(d) Loss on sale of equipment ( 175,000)
(e) Officers’ compensation related to income of prior
periods – accrual overlooked ( 2,104,000)
(f) Share premium – issuance 795,000
(g) Stock subscription defaults 37,250
(h) Gain on sale of treasury shares 147,000
(i) Gain on early retirement of bonds at less than
carrying value 81,000
(j) Gain on life insurance policy settlement 78,000
(k) Correction of prior-period error 30,500
What is the corrected amount of retained earnings on December 31?
Answer: P343,500
Retained earnings, Jan. 1 P2,917,000

(c) Stock dividend ( 500,000)
(e) Correction of prior period error ( 2,104,000)
(f) Correction of prior period error 30,500
Corrected retained earnings, Dec. 31 P 343,500
As of December 31, 2014, the notes receivable account of the Mr. Mime Corporation has a debit balance of P119,600.
There was no balance at January 1. In analyzing this account, you discover that notes amounting to P422,500 were
received from customers during the year under review, P208,000 of which were collected at maturity and P110,500 were
discounted at the Prudential Bank, the credit being to notes receivable. Of the P110,500 notes discounted, P52,000 were
paid at maturity. One note for P15,600 (Magmar Company) was dishonored and was charged back to notes receivable.
Cash in the amount of P16,500 has been received as a partial payment on notes not yet due. These collections are shown
as a liability on the balance sheet in an account entitled “partial payments on notes receivable.”
The Mr. Mime Corporation has also pledged a P25,000 customer’s note as a collateral for the payment of a bank loan. The
company is also treating as a cash item a three-month note for P4,000, given by an officer of the company, which is over a
month past due.
If Mr. Mime Corporation will set up a notes receivable discounted account, what will be adjusted balance of the trade
noted receivable account at December 31, 2014?
Answer: P130,400
Unadjusted balance P119,600

Collection credited as a liability ( 16,500)
Notes receivable discounted still outstanding but previously credited to notes
receivable (110,500 – 52,000 – 15,600) 42,900
Notes receivable discounted which was dishonored and subsequently charged
back to notes receivable (15,600)
Adjusted balance P130,400
In your examination of the financial statements of Staryu Financing Company, you learn that its president has a profit-
sharing agreement with the corporation. The agreement states that the president is to receive a bonus consisting of a basic
amount equivalent to 10% of the company’s net income before deduction of bonus but after deduction of corporate
income tax. 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 taxes the
company would have paid if there were no bonus and the taxes the company must pay after Staryu Financing Company
registered a net income of P100,000 in 2014 before deduction of the president’s bonus or the corporate income tax. The
company is subject to a corporate income tax rate of 30% of its income after deducting the president’s bonus.
The total bonus due to the president for 2014 is
Answer: P10,447.76
Let B = Bonus
TS = tax savings
IT = Income tax
NI = Net income before bonus and tax
B = 10% (NI – T) + TS
TS = 30% (NI) – [30% (NI – B)]
T = 30% (NI – B)
Substituting for TS and T in the first equation:

B = 10%[(P100,000 – 30% (P100,000 – B)] + [30% (P100,000) – 30% (P100,000 – B)]
B = 10%(P100,000 – P30,000 + 3B) + (P300,000 – P30,000 + 0.3B)
B = P7,000+ 0.33B
0.67B = P7,000
B = P10,447.76
Upon inspection of the records of Starmie’s Company, the following facts were discovered for the year ended December
31, 2014:
 A fire premium of P4,000 was paid and charged as insurance expense in 2014. The fire insurance policy
covers one year from April 1, 2014.
 Inventory on January 1, 2014 was understated by P8,000.
 Inventory on December 31, 2014 was understated by P12,000.
 Business taxes of P5,500 for the fourth quarter of 2014 were paid on January 20, 2015 and charged as
expense in 2015.
 On December 5, 2014, a cash advance of P10,000 by a customer was received for goods to be delivered
in January 2015. The P10,000 was credited to sales. The company’s gross profit on sales is 40%.
 The net income of Starmie’s Company on the income statement for the year ended December 31, 2014,
before any adjustments for the above information, is P155,000.
What is the adjusted net income of Starmie’s Company for the year ended for the December 31, 2014?
Answer: P144,500
Unadjusted net income 155,000

Overstatement of insurance expense (P4,000 x 3/12) 1,000
Understatement of inventory 1/1/14 (8,000)
Understatement of inventory 12/31/14 12,000
Understatement of business taxes (5,500)
Advance from a customer treated as sales (10,000)
Adjusted net income 144,500
It has been the policy of Seaking Company to acquire equipment by leasing. On January 1, 2015, Seaking entered into a
lease with lessor Company for a new delivery truck that had a selling price of P1,060,000. The lease contract provides that
annual payments of P210,000 will be made for 6 years. Seaking made the first lease payment on January 1, 2015, and
subsequent payments are made on December 31 of each year. Seaking guarantees a residual value of P183,560 at the end
of the lease term. After considering the guaranteed residual value, the rate implicit in the lease is determined to be 12%.
Seaking has an incremental borrowing rate of 13%. The economic life of the truck is 9 years. Seaking depreciates its other
equipment using the straight-line method and uses the calendar year for financial reporting purposes.
The present value tables show the following data:
12% 15%
Present value of 1 for 6 periods 0.50663 0.43233
Present value of an ordinary annuity for 6 periods 4.11141 3.78448
Present value of an annuity due for 6 periods 4.60478 4.35216
What is the total amount of expenses that should be shown on Seaking’s income statement for the year ended December
31, 2020, in connection with this lease? (Assume that Lessor Company sells the truck for P116,000 at the end of the 6-
year period to a third party.)
Answer: P233,302
Depreciation expense (P329,635 BV on Dec. 31, 2019 –

P183,560 salvage value) P146,075
Interest expense (see amortization table) 19,667
Loss on leased equipment:
Guaranteed residual value P183,560
Less: Realizable value of truck at the end of the lease term 116,000 67,560
Total lease-related expenses P233,302
The Scyther, Inc. reported income before taxes of P842,650 for 2014 and P965,350 for 2015. The company takes its
annual physical count of inventory every December 31. Your audit revealed the following information:
a. The price used for 1,500 units included in the 2014 ending inventory was P109. The correct cost was P190
per unit.
b. Goods costing P23,600 were received from a vendor on January 5, 2015. The shipment was made on
December 26, 2014, under FOB shipping point term. The purchase was recorded in 2014 but the shipment
was not included in the 2014, ending inventory.
c. Merchandise costing P64,750 was sold to a customer on December 29, 2014. Scyther was asked by the
customer to keep the merchandise until January 3, 2015, when the customer would come and pick it up.
Although the sale was properly recorded in 2014, the merchandise was included in the ending inventory.
d. A supplier sold merchandise valued at P14,000 to Scyther, Inc. The merchandise was shipped FOB shipping
point on December 29, 2014, and was received by Scyther on December 31, 2014. The purchase was recorded
in 2015 and the merchandise was not included in the 2014 ending inventory.
What is the adjusted income before taxes for the year ended December 31, 2014?
Answer: P923,000
2014
Reported income before taxes P842,650
Adjustments:
a. Transposition error in unit cost (P190 – P109 = P81 x 1,500) 121,500
b. Goods purchased FOB shipping point 23,600
c. Goods sold in 2014 ( 64,750)
d. Goods purchased FOB shipping point -
Adjusted net income before taxes P923,000
Goldeen has been employed as an accountant by Seadra, Inc. for a number of years. She handles all accounting duties,
including the preparation of financial statements. The following is a statement of earned surplus prepared by Goldeen for
2014:
Seadra, Inc.
STATEMENT OF EARNED SURPLUS FOR 2014
Balance at January 1, 2014 P365,000

Additions:
Change in estimate of 2013 amortization P 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Net income for 2014 150,000
Decreased depreciation due to change in estimated life 13,000 173,000
538,000
Deductions:
Dividends declared and paid P100,000
Loss on sale of equipment 2,500
Loss on estimate 83,000 185,500
Balance at December 31, 2014 P352,500
What is the correct retained earnings balance as of December 31, 2014?

Answer: P352,500
Retained earnings, Jan. 1, 2014 P365,000

Net income for 2014* 87,500
Dividends declared (100,000)
Retained earnings P352,500
Reported net income P150,000

Add: Change in amortization expense P 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Decreased depreciation – due to change in estimated useful life 13,000 23,000
173,000
Deduct: Loss on sale of equipment P 2,500
Loss on earthquake 83,000 85,500
Corrected net income for 2014* P 87,500
In the past, Horsea Company has depreciated its computer hardware using the straight line method. The computer
hardware has a 10% salvage value and an estimated useful life of 5 years. As a result of the rapid advancement in
information technology, management of Horsea has determined that it receives most of the benefits from its computer
facilities in the first few years of ownership. Hence, as of January 1, 2015, Horsea proposes changing to the sum-of-the-
years’-digits method for depreciating its computer hardware. The following computer purchases were made by Horsea at
the beginning of each year.
2012 P90,000
2013 50,000
2014 60,000
What journal entry, if any, should be prepared on January 1, 2015, to adjust the accounts?
Answer: No journal entry
No journal entry is necessary. The change in depreciation method is now accounted for as a change in accounting
estimate. Therefore, the change must be handled currently and prospectively.
PAS 8 provides that the effect of a change in accounting estimate shall be recognized prospectively by including
it in profit or loss in:
a. The period of the change, if the change affects that period only, or
b. The period of the change and future periods, if the change affects both.
The standard further provides that prospective recognition of the effect of a change in an accounting estimate
means that the change is applied to transactions, other events and conditions form the date of the change in
estimate.
NFJPIA CUP – AUDITING PROBLEMS SGV & Co. CLINCHER QUESTION #1
Given the following information regarding a company’s insurance transactions:
Year 1 Year 2
Prepaid insurance (end of year) P1,000 P2,000
Insurance payable (end of year) 6,000 4,000
Insurance payments paid in cash (during year) 16,000 10,000
What amount of insurance expense should be shown on the year 2 income statement?
Answer: P7,000
Insurance expense –year 2 (P10,000 – P2,000 + P1,000 + P4,000 – P6,000) 7,000
On 1 January 2015 an entity acquired an investment property (building) in a remote location for P100,000. After initial
recognition, the entity measures the investment property using the cost-depreciation-impairment model, because its fair
value cannot be measured reliably on an ongoing basis.
The management:
 assessed the building’s useful life at 50 years from the date of acquisition
 presumed the residual value of the building to be nil (given that the fair value cannot be determined reliably on
an ongoing basis)
 assessed that the entity will consume the building’s future economic benefits evenly over 50 years from the
date of acquisition
 declined an unsolicited offer to purchase the building for P130,000. This is a ‘one-off’ offer that is unlikely to
be repeated in the foreseeable future.
The entity should measure the carrying amount of the building on 31 December 2015 at:
Answer: P98,000
Cost / Purchase price P 100,000

Divided by the Useful life 50 years
Annual depreciation P 2,000
Cost /Purchase price P 100,000

Less: Accumulated depreciation P 2,000
Carrying amount, end 2013 P 98,000
During the second quarter of a calendar year company, the following expenditures were made relative to a qualifying asset
on which interest is to be capitalized: P80,000 on April 1, P90,000 on May 1, and P100,000 incurred uniformly during the
period. What was the average amount of accumulated expenditures for this quarterly accounting period?
Answer: P190,000
April 1 (P80,00 x 3/3) 80,000

May 1 (P90,000 x 2/3) 60,000
April to June (P100,000/2) 50,000
Weighted average expenditures 190,000
Koffing Company provided the following balances for the year ended December 31, 2014:
Cash P500,000
Trade and other receivables 1,500,000
Inventories 100,000
Dairy livestock – immature 50,000
Dairy livestock – mature 400,000
Property, plant and equipment, net 1,400,000
Trade and other payables 520,000
Note Payable - long term 1,500,000
Share capital 1,000,000
Retained earnings - January 1 800,000
Fair value of milk produced 600,000
Gains arising from changes in fair value less costs to sell of dairy
livestock 50,000
Inventories used 140,000
Staff costs 120,000
Depreciation expense 15,000
Other operating expense 190,000
Income tax expense 55,000
How much is the net income for 2014?

Answer: P130,000
Fair value of milk produced P600,000

Gains arising from changes in fair value less costs to sell of dairy
livestock 50,000
Inventories used (140,000)
Staff costs (120,000)
Depreciation expense (15,000)
Other operating expense (190,000)
Income tax expense (55,000)
Net income P130,000
Weezing Company’s own research and development has an on-going project to develop a new production process. At the
end of 2014, Weezing had already spent a total of P300,000, of which P270,000 was incurred before November 1, 2014.
On November 1, 2014, the company’s newly developed production process met the criteria for recognition as an
intangible asset.
During 2015, Weezing incurred additional expenditure of P600,000. A the end of 2015, the recoverable amount of the
intangible asset was estimated to be P570,000, including future cash outflows to complete the process before it is
available for its intended use.
At December 31, 2014, the production process should be recognized at a cost of

Answer: P30,000
Cost of the production process at Dec. 31, 2014 (300,000 – 270,000) P30,000
PAS 38 provides that the cost of an internally generated intangible asset is the sum of expenditures incurred from
the date when the intangible asset first meets the recognition criteria. The standard prohibits recognition as part of
the cost of an intangible asset at a later date, the expenditure that was initially recognized as an expense when it
was incurred.

Nfjpia Cup - Auditing Problems SGV & Co. Easy Question #1: Answer: P126,816

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NFJPIA CUP – AUDITING PROBLEMS SGV & Co.

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

Total proceeds 2,000,000

Present Value Calculation:

PV of ordinary annuity = 1 – (1 + i)-n / i

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #2

Minimum lease Liability

The annual depreciation expense in relation to the leased asset is

Lease liability (initial) P98,512

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #4

Cumulative additional depreciation (1M / 10 x 5) 500,000

Carrying amount 1/1/14 (6,000,000 – 1,000,000 = 5,000,000 / 10 x 5) 2,500,000

Total amount of expense (500,000 + 600,000) 1,100,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #5

December 31, 20XA December 31, 20XB

Answer: Overstatement of P100,000

Under/(Over)statement of working capital as

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #6

Sales (20% markup on cost) P600,000

The inventory as of December 31, 2014 is

Inventory, December 26, 2014 (per count) P1,975,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #7

Sales, Jan. 1 through May 2, 2014 P360,000

Inventory prior to the fire:

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #8

Attorney’s fees in connection with organization of Kabutops P 4,000

Attorney’s fees in connection with organization of Kabutops P4,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. EASY QUESTION #9

Pretax book income P100,000

Cost of equipment (cash price equivalent) P2,370,000

NFJPIA CUP – AUDITING PROBLEM SGV & Co. AVERAGE QUESTION #1

Eevee Company incurred research and development costs in 2014 as follows:

Materials used in research and development projects P 400,000

Total research and development cost, per client P4,200,000

NFJPIA CUP – AUDITING PROBLEM SGV & Co. AVERAGE QUESTION #2

Inventory, Dec. 31, 2013 320,000

The estimated inventory shortage at December 31, 2014 was

Inventory, Dec. 31, 2013 P 320,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #3

Date Item Dr. Cr.

Date Covered Computation Amount

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #5

Year Net income Dividends

Answer: Net understatement of P24,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #6

Quantity Cost Market Amount

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #7

The retained earnings account of Ditto Company follows:

Date Item Dr. Cr.

The corrected balance of retained earnings as at December 31, 2014 should be

Retained earnings before adjustments P131,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #8

Jan. 1 Shares outstanding, 400,000; P2 par (750,000 shares authorized).

1st quarter (400,000 + 25,000 = 425,000 x P1.50) P 637,500

Jan. 1 Shares outstanding 400,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. AVERAGE QUESTION #9

What is the corrected pretax income for 2014?

Accounts receivable per trial balance P500,000

NFJPIA CUP – AUDITING PROBLEMS SGV & Co. DIFFICULT QUESTION #1

Construction loan – 12% interest, payable semiannually,

Short-term loan – 10% interest, payable monthly, and principal

Long term loan – 11% interest, payable on January 1 of each