Second Pre-board Examination

Auditing
THEORIES
1. Inquiry and analytical procedures ordinarily performed during a review of a nonpublic entity's
financial statements include:
A. Analytical procedures designed to identify reportable conditions related to internal
control.
B. Inquiries concerning actions taken at meetings of the stockholders and the
board of directors.
C. Analytical procedures designed to test the accounting records by obtaining
corroborating evidential matter.
D. Inquiries of knowledgeable outside parties such as the client's attorneys and bankers.
2. A modification of the CPA's report on a review of the interim financial statements of a
publicly-held company would be necessitated by which of the following?
A. An uncertainty.
B. Lack of consistency.
C. Reference to another accountant.
D. Inadequate disclosure.
3. Which of the following does not result in a modification of a compilation report?
A. A lack of independence on the part of the auditors.
B. A departure from generally accepted accounting principles.
C. A lack of adequate disclosure in the financial statements.
D. A lack of consistent application of generally accepted accounting
principles.
4. When a practitioner examines projected financial statements, the practitioner's report should
include a separate paragraph that:
A. Describes the limitations on the usefulness of the presentation.
B. Provides an explanation of the differences between an examination and a review.
C. States that the accountant is responsible for events and circumstances for a period
not exceeding one year after the report's date.
D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the
projection.
5. Under the attestation standards, in which of the following circumstances is a review report
least likely to be issued?
A. Criteria are agreed-upon or only available to specified users.
B. Established criteria exist, but other criteria are used.
C. The subject matter departs from the criteria.
D. A significant limitation on the scope of the engagement has occurred.
6. Accepting an engagement to examine an entity's financial projection most likely would be
appropriate if the projection were to be distributed to:
A. All employees who work for the entity.
B. Potential stockholders who request a prospectus or a registration statement.
C. A bank with which the entity is negotiating for a loan.
D. All stockholders of record as of the report date.
7. Which of the following is correct concerning requirements about auditor communications
about fraud?
A. Fraud that involves senior management should be reported directly to the
audit committee regardless of the amount involved.
B. All fraud with a material effect on the financial statements should be reported directly
by the auditor to the Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be disclosed
by the auditor through use of an "emphasis of a matter" paragraph added to the audit
report.
D. The auditor has no responsibility to disclose fraud outside the entity under any
circumstances.
8. Which of the following factors most likely would lead a CPA to conclude that a potential audit
engagement should not be accepted?
A. There are significant related party transactions that management claims occurred in
the ordinary course of business.
B. Internal control activities requiring the segregation of duties are subject to
management override.
C. Management continues to employ an inefficient system of information technology to
record financial transactions.
D. It is unlikely that sufficient evidence is available to support an opinion on
the financial statements.
9. Which of the following procedures is not performed as a part of planning an audit
engagement?
A. Reviewing the working papers of the prior year.
B. Performing analytical procedures.
C. Confirmation of all major accounts.
D. Designing an audit program.
10. Which of the following statements is correct regarding the auditor's determination of
materiality?
A. The planning level of materiality should normally be the larger of the amount
considered for the balance sheet versus the income statement.
B. The auditors' planning level of materiality may be disaggregated into
smaller "tolerable misstatements" for the various accounts.
C. Auditors may use various rules of thumb to arrive at an evaluation level of materiality,
but not for determining the planning level of materiality.
D. The amount used for the planning should equal that used for evaluation.
11. The auditors must consider materiality in planning an audit engagement. Materiality for
planning purposes is:
A. The auditors' preliminary estimate of the largest amount of misstatement that would
be material to any one of the client's financial statements.
B. The auditors' preliminary estimate of the smallest amount of misstatement
that would be material to any one of the client's financial statements.
C. The auditors' preliminary estimate of the amount of misstatement that would be
material to the client's balance sheet.
 D. An amount that cannot be quantitatively stated since it depends on the nature of the
item.
12. Tests for unrecorded assets typically involve tracing from:
A. Source documents to recorded journal entries.
B. Source documents to observations.
C. Recorded journal entries to documents.
D. Recorded journal entries to observations.
13. A successor auditor has accepted an engagement that was previously performed by a
predecessor auditor and, prior to accepting the engagement, has communicated with the
predecessor. When the successor believes that the predecessor has performed satisfactory
previous audits, which of the following is correct?
A. A second communication is required and must include details of previous audits.
B. Ordinarily the successor auditors may be able to accept the opening
balances of the current year with a minimum of verification work.
C. Absent ongoing litigation, a predecessor must provide all working papers requested
by the predecessor.
D. The client should be informed of the need to perform a detailed audit of all opening
balances.
14. The first standard of field work recognizes that early appointment of the independent
auditors has many advantages to the auditors and the client. Which of the following advantages
is least likely to occur as a result of early appointment of the auditors?
A. The auditors will be able to plan the audit work so that it may be done expeditiously.
B. The auditors will be able to complete substantive procedures prior to year-
end.
C. The auditors will be able to better plan for the observation of the physical inventories.
D. The auditors will be able to perform the examination more efficiently and will be
finished at an early date after the year-end.
15. The auditors will not ordinarily initiate discussion with the audit committee concerning the:
A. Extent to which the work of internal auditors will influence the scope of the
examination.
B. Extent to which change in the company's organization will influence the scope of the
examination.
C. Details of potential problems which the auditors believe might cause a qualified
opinion.
D. Details of the procedures which the auditors intend to apply.
16. Tests of controls do not ordinarily address:
A. By whom a control was applied.
B. How a control was applied.
C. The consistency with which a control was applied.
D. The cost effectiveness of the way a control was applied.
17. Which statement is correct concerning the relevance of various types of controls to a
financial statement audit?
A. An auditor may ordinarily ignore the consideration of controls when a substantive
audit approach is used.
 B. Controls over the reliability of financial reporting are ordinarily most
directly relevant to an audit, but other controls may also be relevant.
C. Controls over safeguarding assets and liabilities are of primary importance, while
controls over the reliability of financial reporting may also be relevant.
D. All controls are ordinarily relevant to an audit.
18. When tests of controls reveal that controls are operating as anticipated, it is most likely that
the assessed level of control risk will:
A. Be less than the preliminary assessed level of control risk.
B. Equal the preliminary assessed level of control risk.
C. Equal the actual control risk.
D. Be less than the actual control risk.
19. Which of the following comes closest to outlining the auditors' responsibility for considering
internal control in all financial statement audits?
A. An understanding of the control environment, information and communication, risk
assessment and monitoring is necessary; an understanding of control activities is only
necessary for areas in which the auditor is performing tests of controls.
B. The auditor must obtain an understanding of each of the five internal
control components sufficient to assess the risks of material misstatement for
the audit.
C. When tests of controls have been performed, control risk must be assessed at a level
less than the maximum.
D. An understanding of the control environment is necessary, but no understanding of
the other components is necessary unless control risk is to be assessed at a level less
than the maximum.
20. Which of the following is least likely to be considered a risk assessment procedure relating
to internal control?
A. Counting marketable securities at year-end.
B. Inquiries of client personnel.
C. Inspecting documents and reports.
D. Observing the application of specific controls.
21. Which of the following is true about analytical procedures?
A. Performing analytical procedures results in the most reliable form of evidence.
B. Analytical procedures are tests of controls used to evaluate the quality of a client's
internal control.
C. Analytical procedures are used for planning, but they should not be used to obtain
evidence as to the reasonableness of specific account balances.
D. Analytical procedures are used in planning, as a substantive procedure for
specific accounts, and in the final review of the audited financial statements.
22. Which of the following is not a basic approach often used by auditors to evaluate the
reasonableness of accounting estimates?
A. Confirmation of amounts.
B. Review of management's process of development.
C. Independent development of an estimate.
D. Review of subsequent events.
23. When considering the use of management's written representations as audit evidence about
the completeness assertion, an auditor should understand that such representations:
A. Complement, but do not replace, substantive procedures designed to
support the assertion.
B. Constitute sufficient evidence to support the assertion when considered in
combination with a moderate assessed level of control risk.
C. Are generally sufficient audit evidence to support the assertion regardless of the
assessed level of control risk.
D. Replace the assessed level of control risk as evidence to support the assertions.
24. During an audit engagement pertinent data are prepared and included in the audit working
papers. The working papers primarily are considered to be:
A. A client-owned record of conclusions reached by the auditors who performed the
engagement.
B. Evidence supporting financial statements.
C. Support for the auditors' representations as to compliance with generally
accepted auditing standards.
D. A record to be used as a basis for the following year's engagement.
25. The permanent file section of the working papers that is kept for each audit client most
likely contains:
A. Review notes pertaining to questions and comments regarding the audit work
performed.
B. A schedule of time spent on the engagement by each individual auditor.
C. Correspondence with the client's legal counsel concerning pending litigation.
D. Narrative descriptions of the client's accounting procedures and controls.
26. An auditor performs analytical procedures that involve comparing the gross margins of
various divisional operations with those of other divisions and with the individual division's
performance in previous years. The auditor notes a significant increase in the gross margin at
one division. The auditor does some preliminary investigation and also notes that there were no
changes in products, production methods, or divisional management during the year. Based on
the above information, the most likely cause of the increase in gross margin would be:
A. An increase in the number of competitors selling similar products.
B. A decrease in the number of suppliers of the material used in manufacturing the
product.
C. An overstatement of year-end inventory.
D. An understatement of year-end accounts receivable.
27. If all other factors specified in an attributes sampling plan remain constant, decreasing the
tolerable rate and increasing the estimated population deviation rate would have what effect on
sample size?
A. Increase.
B. Remain the same.
C. Decrease.
D. Indeterminate, depends upon exact change being made.
28. In performing a test of a control last year the auditors specified a tolerable deviation rate of
X percent. This year the auditors have specified a tolerable rate of less than X percent.
Assuming that all other factors remain the same, which of the following is true regarding the
relationship between this year's sample size compared to last year's sample size?
A. This year's sample is larger than last year's sample.
B. This year's sample is smaller than last year's sample.
C. This year's sample is equal to last year's sample.
D. This year's sample is indeterminate in relation to last year's sample.
29. When the auditors have chosen to test a control, what relationship will the tolerable rate
normally have when compared to the expected rate of deviations in the sample?
A. Exceed.
B. Equal.
C. Be less than.
D. Indefinite.
30. An audit basically consists of having the auditor form an opinion regarding management's
financial statement assertions. The auditor therefore develops general and specific program
steps to apply to the accounts and transactions. In a particular case, s/he might do this by:
A. Tracing sales invoices to shipping documents to tests the completeness of reported
sales.
B. Tracing shipping documents to sales invoices to test the occurrence of reported sales.
C. Tracing sales invoices to shipping documents to test the occurrence of
reported sales.
D. Tracing sales invoices to shipping documents to test the completeness of recorded
accounts receivable.
31. Which of the following fraudulent activities most likely could be perpetrated due to the lack
of effective internal controls in the revenue cycle?
A. Merchandise received is not promptly reconciled to the outstanding purchase order
file.
B. Obsolete items included in inventory balances are rarely reduced to the lower of cost
or market value.
C. The write-off of receivables by personnel who receive cash permits the
misappropriation of cash.
D. Fictitious transactions are recorded that cause an understatement of revenue and
overstatement of receivables.
32. An audit program for the examination of the retained earnings account should include a
step that requires verification of the:
A. Market value used to charge retained earnings to account for a two-for-one stock
split.
B. Approval of the adjustment to the beginning balance as a result of a write-down of an
account receivable.
C. Authorization for both cash and stock dividends.
D. Gain or loss resulting from disposition of treasury shares.
33. Material loss contingencies should be recorded in the financial statements if available
information indicates it is probable that a loss had been sustained prior to the balance sheet
date and the amount of such loss can be reasonably estimated. These considerations will affect
the audit report as follows:
 A. If a loss has been recorded in accordance with these criteria, the auditor may issue
an unqualified opinion but is required to point out the contingency in an explanatory
paragraph of the report.
B. If a loss meets these criteria but is disclosed in the financial statement notes rather
than being recorded therein, the auditor may issue an unqualified opinion, but is
required to point out the contingency in an explanatory paragraph of the report.
C. If a loss meets these criteria but is disclosed in the financial statement notes rather
than being recorded therein, the auditor may issue an unqualified opinion, but should
consider adding an explanatory paragraph as a means of emphasizing the disclosure.
D. If a loss is probable but the amount cannot be reasonably estimated and is
disclosed in the notes to the financial statements rather than being recorded
therein, the auditor may issue an unqualified opinion.
34. In planning an operational audit, an on-site survey could assist with all of the following,
except:
A. Obtaining auditee comments and suggestions on control problems.
B. Obtaining preliminary information on internal control.
C. Identifying areas for audit emphasis.
D. Evaluating the effectiveness of the internal control.
35. The completeness of computer-generated sales figures can be tested by comparing the
number of items listed on the daily sales report with the number of items billed on the actual
invoices. This process uses:
A. Self-checking numbers.
B. Control totals.
C. Validity tests.
D. Process tracing data.

PROBLEMS
Problem 1
You have been assigned to audit the financial statements of AYALA MERCHANTS
CORPORATION for the year 2015. The company is a dealer of appliances and has several
branches in Metro Manila. Its main office is located in Makati City. You were given by the
company controller the unadjusted balances of the items to be included in the company’s
statement of financial position and statement of income as of and for the year ended December
31, 2015. Audit findings are as follows:

I. AUDIT OF CASH
A cash count was conducted by your staff on January 7, 2016. The petty cash fund of
P60,000 maintained by the company on an imprest basis relected a balance of P22,750.
Unreplenished expenses totaled P37,250 of which P9,510 pertains to January 2016.
You were furnished a copy of the company’s bank reconciliation statement with
Chartered Bank as follows:
Balance per bank P277,994
Add: Deposit in transit 248,836
Bank debit memos 712,750
 Returned check 63,000
Less: Outstanding checks (174,580)
Book error (72,000)
Balance per books P1,056,000
Your review of the reconciliation statement disclosed the following:
1. Postdated checks totaling P107,400 were included as part of the deposit in transit.
These represent collections from various customers whose accounts have been
outstanding for less than three months. These checks were actually deposited on
January 8, 2016.
2. Included in the deposit in transit is a check from a customer for P63,000 which was
returned by the bank on December 27, 2015 for insufficiency of funds. This account has
been outstanding for over six months. The check was replaced by the customer on
January 15, 2016.
3. The bank debited the account of Ayala Merchants for P710,000 as payment of notes
payable including interest of P10,000 due on December 26, 2015. This was not recorded
as of year-end.
4. A check was cleared by the bank as P30,900 but was recorded by the bookkeeper as
P102,900. This was in payment of accounts payable.
5. Bank service charges totaling P2,750 were not recorded.

II. AUDIT OF ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS

It is the company’s policy to provide allowance for doubtful accounts as follows:
Less than 3 months P2,500,960 1%
3 to 6 months 843,200 5%
Over 6 months 274,500 10%
Total P3,618,660
An analysis of the accounts receivable schedule showed that several long outstanding
accounts for more than a year totaling P152,460 should be written-off.

III. AUDIT OF MARKETABLE SECURITIES – TRADING

The company’s equity portfolio as of year-end showed the following:
Total Market Value
Shares Cost per Share
Bacnotan Cement 7,000 P108,500 P16.00
Fil-Estate 10,000 195,000 19.75
Ionics 2,400 49,200 24.00
La Tondena 2,000 67,000 26.00
Selecta 8,000 31,600 1.20
Union Bank 1,600 50,880 27.50
P502,180
The securities are listed in the stock exchange. The company follows the fair value
accounting.
IV. AUDIT OF NOTES RECEIVABLE
The note receivable amounting to P1,300,000 represents a loan granted to a subsidiary.
This is covered by a promissory note with interest at 15% per annum dated November 1,
2015. No interest has been accrued on the note as of December 31, 2015.

V. AUDIT OF PREPAYMENTS
Prepaid expenses account consists of the following:
Prepaid advertising P 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Unused office supplies 361,000
P1,911,000
Ayala Merchants renewed its contract with an advertising agency for the annual promotion
as well as the regular advertisement of its products. It paid a total of P640,000, P100,000
of which is for the Christmas promotion while the balance is for the regular promotion and
which will run for one year starting on August 1, 2015. Payment was made on July 20,
2015, and the total amount was reflected as prepaid advertising.
The company leases the main office and store in Makati City at a monthly rental of
P140,000. On November 5, 2015, a check for P420,000 was issued in payment of three-
month rental as per renewal contract which was effective on November 1, 2015. Rental
deposit remained at three months and is included under other assets.
The company’s delivery equipment is insured with Fortune Insurance Corporation for a
total coverage of P2.4 million. Total payment made on November 16, 2015 for the renewal
amounted to P490,000 which covers the period from November 1, 2015 to November 1,
2016. No adjustment has been made as of December 31, 2015.
To take advantage of volume discount ranging from 10% to 20%, the company buys
office and store supplies on a bulk basis. The staff-in-charge bought supplies worth
P220,000 on June 10, 2015 and included the same in their office supplies inventory. As at
year-end, unused office supplies amount to P102,500.

VI. AUDIT OF INVENTORIES

A physical count of inventories was conducted simultaneously in all stores on
December 29 and 20, 2015. Your review of the list submitted by the accountant disclosed
the following:
1. Some deliveries made in December 2015 have not been invoiced and recorded as of
year-end. These items had a selling price of P146,940 with term of 15 days. The
corresponding cost was already deducted from the ending inventory.
2. Goods on consignment to Ayala Merchants totaling P356,000 were included in the
inventory list.
3. Some appliances worth P138,500 were recorded twice in the inventory list.
4. Goods costing P153,800 purchased and paid on December 26 was received on January
4, 2016. The goods were shipped by the supplier on December 28, FOB shipping point.
VII. AUDIT OF PROPERTY, PLANT AND EQUIPMENT
The company purchased additional equipment worth P268,000 on June 30, 2015. At
the date of purchase, it incurred the following additional costs which were charged to
repairs and maintenance account:
Freight-in P30,400
Installation cost 13,000
Total P43,400

The above equipment has an estimated useful life of ten years and estimated salvage value
of P20,000. Depreciation for the above equipment has been provided based on original
cost.
The company discarded some store equipment on October 1, 2015, realizing no salvage
value. The cost of these equipment amounted to P165,520 with an accumulated
depreciation of P138,620 as of December 31, 2015. Depreciation booked from October 1,
2015 to year-end was P10,480. No entry was made on the disposal of the property.

VIII. AUDIT OF ACCRUED EXPENSES

Some expenses for December 2015 were recorded when paid in January 2016. These
are as follows:
Electric bills P73,400
Commission of sales agents 57,000
Telephone charges 42,500
Minor repair of delivery equipment 21,340
Water bills 18,760
Total P213,000

IX. AUDIT OF LIABILITIES

Ayala Merchants obtained a one-year loan from Chartered Bank amounting to P2.6
million at an interest rate of 16% per annum on October 1, 2015. Accrued interest on this
loan was not taken up at year-end.

X. OTHER AUDIT FINDINGS

A review of the minutes of meeting showed that a 10% cash dividend was declared to
shareholders of record as of December 15, 2015, payable on January 31, 2016.
Ayala Merchants Corporation
UNADJUSTED TRIAL BALANCE
December 31, 2015
Debit Credit
Petty cash fund P 60,000
Cash in bank 1,056,000
Trading securities 483,640
Accounts receivable – trade 3,618,660
Allowance for doubtful accounts P 110,360
Notes receivable 1,300,000
Inventories 7,274,900
 Prepaid advertising 640,000
Prepaid insurance 490,000
Prepaid rent 420,000
Office supplies inventory 361,000
Furniture and fixtures 1,298,400
Delivery equipment 2,770,000
Accumulated depreciation 1,177,500
Other assets 548,000
Accounts payable – trade 2,356,320
Notes payable 3,300,000
Accrued expenses 169,040
Bonds payable 5,000,000
Discount on bonds payable 500,000
Ordinary share capital 5,400,000
Retained earnings 792,160
Sales 13,078,000
Cost of goods sold 8,034,000
Operating expenses 3,357,000
Other income 1,453,500
Other charges 625,280

P32,836,880 P32,836,880
Based on the above information, determine the adjusted balances of the following: (Ignore tax
implications.)
1. Petty cash fund
A. P37,250 B. P60,000 C. P22,750 D. P32,260
2. Cash in bank
A. P522,650 B. P450,650 C. P1,056,000 D. P244,850
3. Trading securities
A. P403,640 B. P502,180 C. P491,240 D. P472,700
4. Accounts receivable
A. P3,936,000 B. P3,618,660 C. P3,783,540 D. P3,613,140
5. Allowance for doubtful accounts
A. P110,360 B. P152,640 C. P130,316 D. P88,217
6. Notes and interest receivable
A. P1,331,960 B. P1,332,160 C. P1,332,500 D. P1,300,000
7. Inventories
A. P6,934,200 B. P7,274,900 C. P7,290,200 D. P6,780,400
8. Prepaid insurance
A. P449,167 B. P408,333 C. P490,000 D. P428,750
9. Prepaid rent
A. P140,000 B. P 0 C. P420,000 D. P280,000
10. Prepaid advertising
A. P325,000 B. P640,000 C. P373,334 D. P315,000
11. Office supplies inventory
A. P258,500 B. P117,500 C. P361,000 D. P102,500
12. Total current assets
A. P14,0333,612 B. P13,523,866 C. P13,677,666 D. P13,537,666
13. Property, plant, and equipment
A. P4,068,400 B. P2,905,228 C. P3,946,280 D. P3,902,880
14. Accumulated depreciation
A. P1,038,880 B. P1,041,050 C. P1,177,500 D. P1,179,672
15. Accounts payable
A. P2,525,360 B. P2,428,320 C. P2,597,360 D. P2,356,320
16. Interest payable
A. P104,000 B. P16,178 C. P4,000 D. P27,644
17. Total current liabilities
A. P6,803,798 B. P6,103,798 C. P6,054,360 D. P5,603,798
18. Sales
A. P13,068,440 B. P13,078,000 C. P13,224,940 D. P12,339,500
19. Cost of goods sold
A. P8,034,000 B. P8,236,200 C. P8,018,700 D. P8,374,700
20. Operating expenses
A. P4,296,514 B. P3,357,000 C. P4,341,514 D. P4,621,514

Problem 2
CABOOM LABORATORIES holds a valuable patent (No. 112170) on a device that prevents
certain types of air pollution. Caboom does not manufacture or sell the products and processes
it develops; it conducts research and develops products which it patents, and then assigns the
patents to manufacturers on a royalty basis. The history of Patent No. 112170 is as follows:
Date Activity Cost
2005-2006 Research conducted to develop device P1,259,100
Jan. 2007 Design and construction of a prototype 262,800
Mar. 2007 Testing of models 126,000
Jan. 2008 Legal and other fees to process patent application; patent granted
June 2008 186,150
Nov. 2009 Engineering activity necessary to advance the design of the device
to the manufacturing stage 244,500
April 2011 Research aimed at modifying the design of the patented device 129,000
May 2015 Legal fees paid in a successful patent infringement suit against a
competitor 102,000
Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2013, it revised its useful life estimate downward to 5 remaining years. Amortization
is computed for a full year if the cost is incurred prior to July 1 and no amortization for the year
if the cost is incurred after June 30. Caboom’s reporting date is December 31, 2015.
Compute the carrying value of Patent No. 112170 on each of the following dates:
21. December 31, 2008
A. P180,675 B. P186,150 C. P293,788 D. P175,200
22. December 31, 2012
A. P223,200 B. P52,560 C. P131,400 D. P122,640
23. December 31, 2015
A. P120,560 B. P78,840 C. P52,560 D. P98,550

BARTOLO COMPANY has provided information on intangible assets as follows:

 A patent was purchased from Valenzuela Company for P4,000,000 on January 1, 2014.
Bartolo estimates the remaining useful life of the patent to be 10 years. The patent was
carried in Valenzuela’s accounting records at a net book value of P4,000,000 when
Valenzuela sold it to Bartolo.
 During 2015, a franchise was purchased from Delco Company for P960,000. The contract
which runs for 10 years provides that 5% of revenue from the franchise must be paid to
Delco. Revenue from the franchise for 2015 was P5,000,000. Bartolo takes a full year
amortization in the year of purchase.
 The following research and development costs were incurred by Bartolo in 2015:
Materials and equipment P284,000
Personnel 378,000
Indirect costs 204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2018. The materials
and equipment purchased have no alternative uses.
 On January 1, 2015, because of recent events in the field, Bartolo estimates that the
remaining life of the patent purchased on January 1, 2014 is only 5 years from January 1,
2015.
24. What is the total carrying value of Bartolo’s intangible assets on December 31, 2015?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,681,500
25. As a result of the facts above, compute the total amount of charges against income for
the year ended December 31, 2015?
A. P2,428,000 B. P1,932,000 C. P1,648,000 D. P1,116,000

Problem 3
BRANDY CO. was organized at the beginning of the current year. The following shareholders’
equity accounts are included in the entity’s year-end trial balance.
Preference share capital, P100 par, authorized 100,000 shares,
issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares,
issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000
The following current year transactions relate to Brandy Co.’s shareholders’ equity:
 Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference
shares. Subscriptions to ordinary shares were also received on the same date.
 During the year, subscriptions were received for an additional 12,000 preference shares at a
price of P120 per share.
 Cash payments were received from subscribers at frequent intervals for several months
after subscription. The company’s policy is to issue share certificates only upon full
payment of the share subscription.
 Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a
tract of land with a fair value of P690,000.
26. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000
27. How much was collected from the subscribers of preference shares?
A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000
28. The company’s statement of financial position at the end of the current year should report
contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000

The following shareholders’ equity accounts are included in the statement of financial position
of CONDESSA CO. on December 31, 2014.
Preference share capital, 8%, P100 par (200,000 shares authorized,
60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share premium 3,750,000
Retained earnings 3,500,000
Total P16,250,000
During 2015, Condessa took part in the following transactions concerning equity.
1. Paid the annual 2014 P8 per share dividend on preference shares and a P2 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2014.
2. Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.
3. Reissued 21,000 treasury shares for land valued at P900,000.
4. Issued 15,000 preference shares at P105 per share.
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares are
selling for P45 per share.
6. Issued the stock dividend.
7. Declared the annual 2015 P8 per share dividend on preference shares and the P2 per
share dividend on ordinary shares. These dividends are payable in 2016.
8. Reported net income of P9,900,000 for the current year.
Questions:
29. What is the retained earnings balance (before appropriation for treasury shares) on
December 31, 2015?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000
30. What amount should be reported as total shareholders’ equity on December 31, 2015?
 A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000

Problem 4
On January 1, 2014, SAMSON MFG. CO. began construction of a building to be used as its office
headquarters. The building was completed on June 30, 2015.
Expenditures on the project were as follows:
January 3, 2014 P2,500,000
March 31, 2014 3,000,000
June 30, 2014 4,000,000
October 31, 2014 3,000,000
January 31, 2015 1,500,000
March 31, 2015 2,500,000
May 31, 2015 3,000,000
On January 3, 2014, the company obtained a P5 million construction loan with a 10% interest
rate. The loan was outstanding all of 2014 and 2015. The company’s other interest-bearing
debts included a long-term note of P25 million with an 8% interest rate, and a mortgage of P15
million on another building with an interest rate of 6%. Both debts were outstanding during all
of 2014 and 2015. The company’s fiscal year-end is December 31.
31. What is the amount of capitalizable interest in 2014?
A. P3,400,000 B. P1,043,750 C. P663,125 D. P500,000
32. What is the amount of capitalizable interest in 2015?
A. P630,625 B. P654,663 C. P361,707 D. P799,663
33. What amount of interest should be expensed in 2014?
A. P2,736,875 B. P2,356,250 C. P2,900,000 D. P 0
34. What amount of interest should be expensed in 2015?
A. P2,769,375 B. P3,038,293 C. P2,600,337 D. P2,745,337
35. What is the total cost of the building (including the interest capitalized in 2014 and 2015)?
A. P24,600,000 B. P20,817,788 C. P20,905,457 D. P20,630,625