INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Peñablanca, Cagayan 3502

COLLEGE OF Business Education
ACCOUNTANCY DEPARTMENT
Subject Code: INSTITUTIONAL REVIEW
Subject Title: AUDITING PROBLEMS
Term: DAILY DRILL 3
Semester: FIRST School Year: 2019-2020

Name: Date:
Subject Teacher: Score:

Directions: Read and solve the following problems carefully. Write your answers on a yellow sheet of paper. At
times of difficulties, crying is allowed but please do so quietly. DO NOT wipe your tears on the questionnaire. Finish
the exam in three hours. When the time is up, you should know how to stop and let go. GOOD LUCK and GOD
BLESS!

Audit of Investments
PROBLEM NO. 1
PATRICK COMPANY buys and sells securities expecting to earn profits on short-term differences in price. During
2016, PATRICK Company purchased the following trading securities:
Fair Value
Security Cost Dec. 31, 2016
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000
Before any adjustments related to these trading securities, PATRICK Company had net income of P2,700,000.

1. What is PATRICK’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000
2. What would PATRICK’s net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

PAT CO.’s portfolio of trading securities includes the following on December 31, 2015:
Cost Fair Value
15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069,000 P2,961,000
All of the above securities have been purchased in 2015. In 2016, PAT Co. completed the following securities
transactions:
Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission of P13,500.
April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and other transaction
costs of P4,950.
The PAT Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,000 2
P1,885,950 P1,965,000
1
Net of P19,500 estimated transaction costs that would be incurred on the sale of the securities.
2
Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

3. What amount of unrealized gain on these securities should be reported in the 2016 income statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000
4. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016?
A. P144,000 B. P27,000 C. P130,500 D. P13,500
5. What amount should be reported as trading securities in PAT’s statement of financial position on December 31,
2016?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950

PROBLEM NO. 2
During 2017 and 2018, PATRICK Company’s inexperienced accountant prepared the following entries to account
for transactions relating to PATRICK’s trading securities

2017
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Nov 2 Trading securities 3,206,500
Cash 3,206,500
To record the purchase of P3M of Z Co. 10% bonds at 103.25. Brokerage fees were P9,000. Interest is
payable semi-annually on Jan 1 and Jul 1
Dec 31 Trading Securities 612,500
Unrealized gain – trading securities 612,500
To record the increase in market value based on the data below:
Cost Market Value
X Co. stock 757,700 800,000
Y Co. Stock 973,500 950,000
Z Co. 10% bonds 3,206,500 3,800,000
The aggregate market value of X and Y securities was P1,800,000 at 12/31/2016. No other entries
were made by the accountant in 2017
2018
Jan 2 Cash 150,000
Interest income 150,000
To record 6 months interest
Jul 1 Cash 150,000
Interest income 150,000
To record 6 months interest
Dec 10 FVOCI investments 757,500
Trading securities 757,500
To reclassify X Co. stock from trading to FVOCI. Market value was 735,000 on the date of transfer

6. The Z Co. bonds is initially measured and recognized at

a. 3,097,500 c. 3,106,5000
b. 3,000,000 d. 3,206,500
7. The 2017 interest income is
a. 150,000 c. 50,000
b. none d. 100,000
8. The unrealized gain on trading securities in 2017 is
a. 612,500 c. 23,500
b. 721,500 d. 652,500
9. How much interest income on Z Co. bonds should be reported on 2018?
a. 300,000 c. none
b. 150,000 d. 200,000
10. Unrealized gain on FVOCI investments on 2018
a. 665,500 c. 13,500
b. 730,500 d. none

PROBLEM NO. 3
On July 1 of the current year 2018, PATRICK Company acquired 25% of the outstanding shares of common stock of
Adonis Co., at a total cost of P1,400,000. The underlying equity (net assets) of the stock acquired by PATRICK
Company was only P1,200,000. PATRICK Company was willing to pay more than book value for the Adonis
Company stock for the following reasons:
a. Adonis Company owned depreciable plant assets (10-year remaining economic life) with a current fair
value of P120,000 more than their carrying amount.
b. Adonis Company owned land with a current fair value of P600,000 more than its carrying amount.
c. PATRICK Company believed Adonis Company possessed enough goodwill to justify the remainder of the
cost.

Adonis Company earned net income of P1,080,000 evenly over the current year ended December 31. On December
31, Adonis Company declared and paid a cash dividend of P210,000 to common stockholders. Market value of
Adonis Company’s share of the stock at December 31 is P1,500,000. Adonis Company closes its accounting records
on December 31. As of December 31, 2018, the Investment in Adonis common has a balance of P1,400,000.

PATRICK Company has a portfolio of current marketable equity securities. Information on cost and market value is
as follows:
Cost Market
December 31, 2017 P 950,000 950,000
December 31, 2018 840,000 820,000
PATRICK Company has not recorded yet any allowance for market decline in its marketable securities. Marketable
Securities at December 31, 2018 has a balance of P840,000.

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Presented below is an amortization schedule related to PATRICK Company’s 5-year, P100,000 bond with a 7%
interest rate and a 5% yield, purchased on December 31, 2015, for P108,660.
Date Cash Interest Bond Premium Carrying Value
Received Income Amortization of bonds
12/31/15 108,660
12/31/16 P 7,000 P 5,433 P 1,567 107,093
12/31/17 7,000 5,354 1,646 105,447
12/31/18 7,000 5,272 1,728 103,719
12/31/19 7,000 5,186 1,814 101,905
12/31/20 7,000 5,095 1,904 100,000
As of December 31, 2018, the Investment in bonds is recorded in the balance sheet at P108,660.

11. The Investment in Adonis Company common at year-end is:

a. P 1,473,000 b. P 1,478,500 c. P 1,480,500 d. P 1,481,000
12. The income from investment in the Adonis Company common at year-end is:
a. P 131,000 b. P 133,500 c. P 159,250 d. P 185,50
13. The marketable securities at December 31, 2018 is:
a. P 820,000 b. P 840,000 c. P 930,000 d. P 950,000
14. The amortization of investment in bonds at year-end is:
a. P 1,728 b. P 4,941 c. P 6,669 d. P 7,000
15. Interest income from the investment in bonds at year-end is:
a. P 7,000 b. P 5,354 c. P 5,272 d. P 5,186
16. The investment in bonds at year-end is:
a. P 108,660 b. P 105,447 c. P 103,719 d. P 100,000

PROBLEM NO. 4
On Jan 4, 2018, PATRICK Corp. paid P1,296,000 for 40,000 ordinary shares of Ngoks Corp. The investment
represents a 30% interest in net assets of the investee. PATRICK received dividends of P1 per share on Dec 4, 2018
and the investee reported net income of P640,000 for the year 2018. The market value of the investee’s share at
Dec 31, 2018 was P32 per share. The book value of the investee’s net assets was P3,200,000 and the fair value of
the investee’s depreciable assets with an average remaining useful life of 8 years exceeded book value by
P320,000.
17. What amount is attributable to goodwill from the investment
a. 240,000 c. 336,000
b. 96,000 d. 144,000
18. What total amount of revenue should be reported by the investor from the investment?
a. 120,000 c. 180,000
b. 108,000 d. 192,000
19. Carrying amount of the investment at 12/31/18
a. 1,280,000 c. 1,296,000
b. 1,436,000 d. 1,368,000
20. What total amount of revenue should be reported by the investor from the investment under the cost method?
a. 40,000 c. 60,000
b. 64,000 d. 180,000
21. Carrying amount of the investment at 12/31/18 under the cost method
a. 1,280,000 c. 1,296,000
b. 1,436,000 d. 1,368,000

PROBLEM NO. 5
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the
PATRICK Corporation for the year ended December 31, 2018:

Date Particulars DR CR
Jan. 10 Purchase of POGI Co. – 6,000 shares P1,440,000
Feb. 20 Purchase of GWAPO Co. – 7,200 shares 1,800,000
Mar. 01 Sale of GWAPO Co. – 2,400 shares 540,000
May 31 Receipt of POGI share dividend– Offsetting 132,000
Credit to retained earnings
Aug. 15 Sale of POGI Stocks – 4,800 shares 1,176,000
Sep. 01 Sale of POGI Stocks – 1,200 shares 276,000
From the Philippine Stock Exchange, the POGI dividends were analyzed as follows:

Nature Declared Record Payment Rate

Cash 01/02/18 01/15/18 01/31/18 P20/share

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Share 05/02/18 05/15/18 05/31/18 10%
Cash 08/01/18 08/30/18 09/15/18 P30/share

At December 31, 2018, POGI and GWAPO shares were selling at P210 and P240 per share, respectively

QUESTIONS:
22. The gain or loss on sale of 2,400 GWAPO shares on March 1, 2018 is
23. The net gain or loss on sales of POGI shares in 2018 is
24. The total dividend income to be recognized in 2018 is
25. The carrying amount of Trading Securities as of December 31, 2018 is overstated by
26. The unrealized loss on Trading Securities to be recognized in 2018 profit or loss is

Audit of Inventories
PROBLEM NO. 6
PATRICK COMPANY is a manufacturer of small tools. The following information was obtained from the company’s
accounting records for the year ended December 31, 2018:
Inventory at December 31, 2018 (based on
physical count in PATRICK’s warehouse at cost
on December 31, 2018) 1,870,000
Accounts payable at December 31, 2018 1,415,000
Net sales (sales less sales returns) 9,693,400
Your audit reveals the following information:
 The physical count included tools billed to a customer FOB shipping point on December 31,
2018. These tools cost P64,000 billed at P78,500. They were in the shipping area waiting to be picked up by
the customer.
 Goods shipped FOB shipping point by a vendor were in transit on December 31, 2018.These
goods with invoice cost of P93.400 were shipped on December 29, 2018.
 Work in process inventory costing P27,000 was sent to a job contractor for further processing.
 Not included in the physical count were goods returned by customers on December 31, 2018.
These goods costing P49,000 were inspected and returned to inventory on January 7, 2019. Credit memos
for P67,800 were issued to the customers at that date.
 In transit to a customer on December 31, 2018, were tools costing P17,740 shipped FOB
destination on December 26, 2018. A sales invoice for P29,400 was issued on January 3, 2019, when
PATRICK Company was notified by the customer that the tools had been received.
 At exactly 5:00 pm on December 31, 2018, goods costing P31,200 were received from a vendor.
These were recorded on a receiving report dated January 2, 2019. The related invoice was recorded on
December 31, 2018, but the goods were not included in the physical count.
 Included in the physical count were goods received from a vendor on December 27, 2018.
However, the related invoice for P36,000 was not recorded because the accounting department’s copy of
the receiving report was lost.
 A monthly freight bill for P16,000 was received on January 3, 2019. It specifically related to
merchandise bought in December 2018, one half of which was still in the inventory at December 31, 2018.
The freight was not included in either the inventory or in accounts payable at December 31, 2018.
Question: Based on your analysis and the information above, answer the following:
27. The inventory at year-end is:
28. The accounts payable at year-end is:
29. The amount of sales at year-end is:
30. The adjusted balance of inventory at year-end is:
31. The adjusted balance of accounts payable at year-end is:
32. The adjusted balance of sales at year-end is:

PROBLEM NO. 7
Your audit of PATRICK COMPANY for the year 2018 disclosed the following:
1. The December 31 inventory was determined by a physical count on December 28 and based on such count, the
inventory was recorded by:
Inventory 1,400,000
Cost of sales 1,400,000
2. The 2018 ledger shows a sales balance of P20,000,000.
3. The company sells a mark-up of 20% based on sales.
4. The company recognizes sales upon passage of title to the customers.
5. All customers are within a four-day delivery area.
The sales register for December, 2018 and January, 2019, showed the following details:
December Register
Invoice No. FOB Terms Date Shipped Amount

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300 Destination 12/30 50,000
301 Shipping point 12/30 62,500
302 Destination 12/23 47,500
303 Destination 12/24 82,500
304 Shipping point 01/02 56,000
305 Shipping point 12/29 90,000
January Register
Invoice No. FOB Terms Date Shipped Amount
306 Destination 12/29 67,500
307 Shipping point 12/29 74,500
308 Destination 01/02 140,000
309 Shipping point 01/04 73,000
310 Shipping point 12/27 67,500
Questions:
33. The Sales for December is over/under by:
a. P 36,000 under c. P 106,000 under
b. P 36,000 over d. P 106,000 over
34. The Inventory for December is over/under by:
a. P 235,600 under c. P 181,600 under
b. P 235,600 over d. P 181,600 over
35. The adjusted inventory at December 31, 2018 is:
a. P 1,645,412 b. P 1,635,600 c. P 1,218,400 d. P 1,164,400
36. The adjusted sales at December 31, 2018 is:
a. P 20,106,000 b. P 20,036,000 c. P 19,964,000 d. P 19,894,000
37. How much sales for the month of December 2018 were erroneously recorded in January 2019?
a. P 282,000 b. P 272,500 c. P 198,000 d. P 142,000
38. How much sales for the month of January 2019 were erroneously recorded in December 2018?
a. P 228,500 b. P 188,500 c. P 180,500 d. P 106,000

PROBLEM NO. 8
The PATRICK Company is a wholesale distributor of automotive replacement parts.
Initial amounts taken from PATRICK’s accounting records are as follows:

Net income for the year ended December 31, 2007 P 2,172,000
Inventory at December 31, 2007 (based on Physical count of goods in PATRICK’s
warehouse on December 31, 2007) 1,250,000
Net purchases in 2007 3,215,000
Net sales in 2007 9,000,000

Vendor Terms Amount

B Company 2% 10 days, net 30 P 265,000
C Company Net 30 210,000
D Company Net 30 300,000
E Company Net 30 225,000
F Company Net 30 -
G Company Net 30 -
P1,000,000

Additional information is as follows:

 Parts held on consignment from C to PATRICK, the consignee, amounting to P155,000, were included in the
physical count of goods in PATRICK’s warehouse on December 31, 2007, and in accounts payable at
December 31, 2007.
 P22,000 of parts which were purchased from F and paid for in December 2007 were sold in the last week of
December 2007 for P28,000. PATRICK appropriately recorded the sale in December. The parts were
included in the physical count of goods in PATRICK’s’ warehouse on December 31, 2007, because the parts
were on the loading dock waiting to be picked up by customers.
 Parts in transit on December 31, 2007, to customers, shipped F.O.B. shipping point, on December 28, 2007,
amounted to P34,000. The customers received the parts on January 6, 2008. Sales of P40,000 to the
customers for the parts were recorded by PATRICK on January 2, 2008.
 Retailers were holding P210,000 at cost (P250,000 at retail), of goods on consignment from PATRICK, the
consignor, at their stores on December 31, 2007.
 Goods were in transit from G to PATRICK on December 31, 2007. The cost of the goods was P25,000, and
they were shipped F.O.B. shipping point on December 29, 2007.

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  A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December
2007, all of which was still in the inventory at December 31, 2007, was received on January 3, 2008. The
freight bill was not included in either the inventory or in accounts payable at December 31, 2007.
 All the purchases from B occurred during the last seven days of the year. These items have been recorded
in accounts payable and accounted for in the physical inventory at cost before discount. PATRICK’s policy
is to pay invoices in time to take advantage of all cash discounts, adjust inventory accordingly, and record
accounts payable, net of cash discounts.
39. Adjusted inventory balance at the end of 2007.
a. P1,326,700 b. P1,306,700 c. P1,304,700 d. P1,310,000
40. Adjusted balance of accounts payable at December 31, 2007.
a. P888,700 b. P866,700 c. P1,021,700 d. P872,000
41. Adjusted net purchases in 2007.
a. P3,081,700 b. P3,087,000 c. P3,079,000 d. P3,103,000
42 Adjusted net sales in 2007.
a. P9,000,000 b. P9,040,000 c. P8,960,000 d. P9,018,000
43. Adjusted net income in 2007.
a. P2,400,000 b. P3,422,000 c. P2,425,000 d. P2,403,000

PROBLEM NO. 9
The following information pertains to PATRICK incorporated for the three months ended March 31, 2018.
Cost Retail
Inventory 179,600 200,000
Purchases 475,400 800,000
Purchase returns 50,000 80,000
Purchase discounts 23,000
Purchase allowance 10,000
Freight in 5,000
Markups 200,000
Markup cancellations 40,000
Departmental transfer in – debit 70,000 100,000
Departmental transfer out – credit 60,000 90,000
Abnormal loss 20,000 40,000
Markdown 115,000
Markdown cancellations 10,000
Sales 800,000
Sales returns 80,000
Sales allowances and discounts 120,000
Normal shrinkage 100,000

Required: Ending inventory and cost of goods sold assuming

44. Conservative method
45. FIFO method
46. Average method

PROBLEM NO. 10
You were engaged by PATRICK Corporation for the audit of the company’s financial statements for the year ended
December 31, 2018. The company is engaged in the wholesale business and makes all sales at 25% over cost.

The following were gathered from the client’s accounting records:

SALES PURCHASES
Date Ref. Amount Date Ref. Amount
Balance forwarded 5,200,000 Balance forwarded 2,700,000
Dec. 27 SI No. 965 40,000 Dec. 27 RR No. 1057 35,000
Dec. 28 SI No. 966 150,000 Dec. 28 RR No. 1058 65,000
Dec. 28 SI No. 967 10,000 Dec. 29 RR No. 1059 24,000
Dec. 31 SI No. 969 46,000 Dec. 30 RR No. 1061 70,000
Dec. 31 SI No. 970 68,000 Dec. 31 RR No. 1062 42,000
Dec. 31 SI No. 971 16,000 Dec. 31 RR No. 1063 64,000
Dec. 31 Closing entry (5,530,000) Dec. 31 Closing entry (3,000,000)
P - P -
Note: SI = Sales Invoice RR = Receiving Report

Inventory P600,000
Accounts receivable 500,000
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 Accounts payable 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was
properly taken.

When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report
which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is
larger than No. 968. You also obtained the following additional information:

a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and
received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost
was P18,000.
b) On the evening of December 31, there were two trucks in the company siding:
• Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No.
1063. The freight was paid by the vendor.
• Truck No. AKO 143 was loaded and sealed on December 31 but leave the company premises on January 2.
This order was sold for P100,000 per Sales Invoice No. 968.
c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to
KAHITMAHIRAP Corporation. KAHITMAHIRAP received the goods, which were sold on Sales Invoice No. 966
terms FOB Seller, the next day.
d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No.
1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight
was deducted from the purchase price of P800,000.

QUESTIONS: Based on the above and the result of your audit, determine the following:
47. Sales for the year ended December 31, 2018
a. P5,250,000 c. P5,400,000
b. P5,150,000 d. P5,350,000
48. Purchases for the year ended December 31, 2018
a. P3,000,000 c. P3,018,000
b. P3,754,000 d. P3,818,000
49. Inventory as of December 31, 2018
a. P864,000 c. P744,000
b. P800,000 d. P814,000
50. Accounts receivable as of December 31, 2018
a. P350,000 c. P370,000
b. P220,000 d. P120,000
51. Accounts payable as of December 31, 2018
a. P418,000 c. P 400,000
b. P354,000 d. P1,218,000

In the end, what matters most is how your life mattered to the lives of others. Everything else is just a passing moment.

~End of Examination~

Prepared by:

Michael Patrick A. Pineda, CPA

Instructor

Checked by:

Mark John D. Gonzales, CPA

Program Coordinator
Noted by:

CB Ronie E. Sugarol, MPBM

Dean, College of Business and Accountancy

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