AUDITING PROBLEMS

PROBLEM 1
NDU Corporation has 32,000 shares of P2 par common stock authorized. Only 75% of
these shares have been issued, and of the shares issued, only 22,000 are outstanding. On
December 31, 2006, the stockholders’ equity section revealed that the balance in Paid-in
Capital in Excess of Par Value – Common was P832,000, and the Retained Earnings was
P120,000. Treasury stock was purchased at an average cost of P40 per share.

During 2007 NDU Corporation had the following transactions:

Jan 15 NDU issued, at P52.50 per share, 1,600 shares of P50 par, 4% cumulative
preferred stock; 4,000 share are authorized.

Feb 1 NDU sold 3,000 share of newly issued P2 par common stock at P45 per share.

Mar 15 NDU declared a cash dividend on common stock of P0.20 per share, payable on
April 30 to all stockholders of record on April 1.

Apr 15 NDU reacquired 400 shares of its common stock for P38 per share.

30 Employees exercised 2,000 stock options granted in 1999. When the option were
granted, each option entitled the employees to purchase 1 share of common
stock for P50 per share. The share price on the grant date was P60 per share.
On April 30, when the market price was P55 per share, NDU issued new shares to
the employees.

May 1 NDU declared a 25% stock dividend to common stockholders to be distributed on

June 1 to stockholders of record May 7. The market price of the common stock
was P50 per share on May 1.

31 NDU sold 300 treasury shares reacquired on April 15 and an additional 400
shares costing P16,000 that had been on hand since the beginning of the year.
The selling price was P60 per share.

Sept 15 The semiannual cash dividend on common stock was declared, amounting to
P0.20 per share. NDU also declared the yearly dividend on preferred stock. Both
are payable on October 15 of record on October 1.

Net income for 2007 was P150,000.

Questions:

1. The preferred stock balance on December 31, 2007 should be

a. P 80,000 b. P 84,000 c. P 86,000 d. P 90,000

2. The common stock balance on December 31, 2007 should be

a. P 56,000 b. P 61,300 c. P 71,300 d. P 75,300

3. The paid-in capital in excess of par – common balance at December 31, 2007 should
be
a. P 245,000 b. P 961,000 c. P 1,077,000 d. P 1,396,200

4. The paid-in capital in excess of par – preferred balance at December 31, 2007 should
be
a. P 4,000 b. P 20,000 c. P 80,000 d. P 94,600

5. The dividends payable – common balance at December 31, 2007 should be

a. P 8,494 b. P 8,244 c. P 3,750 d. P 0

PROBLEM 2
NDMC Corporation has been in its plant facility for 10 years. Although the plant is quite
functional, numerous repair costs are incurred to maintain it in sound working order. The
company’s plant asset book value is currently P3,000,000 as indicated below:

Original cost 6,000,000

Accumulated depreciation 3,000,000
Net carrying value 3,000,000

During the current year, the following expenditures were made to the plant facility:
1. Because of increased demand for its product, the company increased its plant capacity
by building a new addition at a cost of P1,660,000.

2. The entire plant was repainted at a cost of P234,000.

3. The roof was an asbestos cement slate; for safety purposes it was removed and replaced
with a wood shingle roof at a cost of P700,000. Book value of the old roof was
P130,000. The original cost was P310,000.

4. The electrical system was completely updated at a cost of P388,000. The cost of the old
electrical system was not known. It is estimated that the useful life of the building will
not change as a result of this updating.

5. A series of major repairs were made at a cost of P640,000 because parts of the wood
structure were rotting. The cost of the old wood structure was not known. These
extensive repairs are estimated to increase the useful life of the building.

Questions:

6. After considering the transactions above, the balance of the Buildings account should
be
a. P 8,748,000 b. P 8,672,000 c. P 8,618,000 d. P 8,438,000

7. After considering the transactions above, the balance of the Accumulated

Depreciation account should be
a. P 3,000,000 b. P 2,820,000 c. P 2,230,000 d. P 2,180,000

8. The loss from replacement of roof is

a. P 0 b. P 130,000 c. P 180,000 d. P 310,000

Problem 3
The following entries were made by the accountant of NDMU COMPANY:

2007
Jan 2 Investment in bonds 11,120,000
Cash 11,120,000
Purchase of P10,000,000, 18% bonds at 102plus accrued interest and broker’s fee.
Bonds mature January 1, 2010.

Jan 3 Cash 900,000

Interest income 900,000
Interest received on 18% investment in bonds. (This same entry was made when
interest was received on July 1, 2007).

July 1 Investment in preferred stock 10,020,000

Premium paid on preferred stock 200,000
Cash 10,220,000
Purchase of 100,000 shares of 8% P100 preferred stock of Al Corp. at 102; broker’s
fee, P20,000

Dec 1 Investment in common stock 5,000,000

Cash 5,000,000
Purchase of 50,000 shares P100 par common stock of Randy Co. at P100 per share
after a P1 per share dividend had been declared by Randy Co. No broker’s fee.

Dec 31Cash 800,000

Premium paid on preferred stock 200,000
Dividend income 600,000
Dividend received on preferred stock investment

Dec 31Cash 50,000

Investment in common stock 50,000
P1 per share on investment in common stock

Question:
9. What is the total interest income on investment in bonds for 2007?
a. P 1,827,500 b. P 1,800,000 c. P 1,772,500 d. P 927,500

10. What is the carrying value of the investment in bonds at December 31, 2007?
a. P 11,092,500 b. P 10,247,500 c. P 10,200,000 d. P 10,192,500

11. What is the dividend income on preferred stock investment for 2007?
 a. P 0 b. P 200,000 c. P 600,000 d. P 800,000

12. What adjusting entry should be made at December 31, 2007, to correct the
investment in common stock account?
a. Dividend income 50,000 c. Retained earnings 50,000
Invest. In CS 50,000 Invest. in CS 50,000
b. Retained earnings 50,000 d. No adjusting entry
Dividend income 50,000

Problem 4
On January 10, 2007, you started the audit of the financial records of NDDU Corporation for
the year ended December 31, 2006. From your investigation, you discovered the following:

1. The bookkeeper acts also as the cashier. Her December 31, 2006 year-end cash
reconciliation contained the following:

Cash per ledger, 12/31/04 161,400

Cash per bank, 12/31/04 164,850
Checks outstanding 15,850
Bing Corporation check charged by bank in error
13/30/04, corrected by bank on 1/04/05 750
Deposit in transit, credit by bank on 1/3/05 7,200

2. The cash account balance per ledger as of 12/31/04 were:

Cash 161,400
Petty Cash 1,500

3. The cost of the cash on hand at the close of business on January 10, 2007, including the
petty cash was as follows:

Currencies and coins 9,850

Expense vouchers ( 800)
Employees’ IOU dated 1/5/05 ( 300)
Customers’ checks in payment of account 900
11,850

4. From January 2, 2007 to January 10, 2007, the date of your cash count, total cash
receipts appearing in the cash record were P38,600. According to the bank statement
for the period from January 2, 2007 to January 10, 2007, total deposits were P32,400.

5. On July 5, 2006, cash of P1,600 was received from a customer in settlement of his
account. This was booked by a debit to Allowance for Doubtful Accounts and a credit to
Accounts Receivable.

6. On December 5, 2006, cash of P2,900 was received from a customer in settlement of his
account. NDDU Corporation debited Inventory and credited Accounts Receivable.

7. Cash of P1,800 received from customer during 2006 was not recorded.

8. Checks received from customers from January 2, 2007 to January 10, 2007, totaling
P4,200 were not recorded but were deposited in the bank.

9. On July 1, 2006, the bank refunded interest of P200 because a note of NDDU
Corporation was paid before maturity. No entry had been made for the refund.

10. In the cashiers petty cash, there were receipts for collection from customer on January
9, 2007 totaling P1,250; these were unrecorded and undeposited.

11. In the outstanding checks, there is one for P750 made payable to a trade creditor.
Investigation shows that this check had been returned by the creditor on June 14, 2006
and a new check for P1,250 was issued in its place; the original check for P750 was
made in error as to amount.

Questions:

13. The adjusted bank balance as of December 31, 2006 is:

a. P 158,450 b. P 157,700 c. P 156,950 d. P 150,700

14. The correct cash balance, per ledger as of December 31, 2006 is:
a. P 169,700 b. P 168,650 c. P 167,900 d. P 167,700
15. The amount of cash shortage as of December 31, 2006 is:
a. P 16,500 b. P 11,250 c. P 10,950 d. P 10,200

16. The amount of cash shortage for the period from January 1, 2007 to January 10,
2007 is:
a. P 4,300 b. P 7,000 c. P 8,500 d. P 15,700

Problem 5
Abam Corporation is selling audio and video appliances. The company’s fiscal year ends on
March 31. The following information relates the obligations of the company as of March 31,
2004.

Notes payable
Abam has signed several long- term notes with financial institutions. The maturities of these
notes are given below. The total unpaid interest for all of these notes amount to P340,000
on March 31, 2004.

Due date Amount

April 31, 2004 P 600,000
July 31, 2004 900,000
September 1, 2004 450,000
February 1, 2005 450,000
April 1, 2005- March 31, 2008 2,700,000
P5,100,000
Estimated warranties:
Abam has one year product warranty on some selected items. The estimated warranty
liability on sales made during the 2002- 2003 fiscal year and still outstanding as of March
31, 2003, amounted to P252,000. The warranty costs on sales made from April 1, 2003 to
March 31, 2004 are estimated at P630,000. The actual warranty costs incurred during 2003-
2004 fiscal year as follows:

Warranty claims honored on 2002- 2003 P252,000

Warranty claims honored on 2003- 2004 sales 285,000
Total P537,000

Trade payables
Accounts payable for supplies, goods and services purchases on open account amount to
P560,000 as of March 31, 2004.

Dividends
On march 10, 2004, Abam’s board of directors declared a cash dividend of P0.30 per
common share and a 10% common stock dividend. Both dividends were to be distributed on
Aptil 5, 2004 to common stockholders on record at the close of business on March 31, 2004.
As of March 31, 2004, NDKC has 5 million, P2 par value common stock shares issued and
outstanding.

Bonds payable
NDKC issued P5,000,000, 12% bonds, on October 1, 1998 at 96. The bonds will mature on
October 1, 2008. Interest is paid semi- annually on October 1 and April 1. NDKC uses
straight line method to amortize bond discount.

Based on the forgoing information, determine the adjusted balances of the following as of
March 31, 2004:

17. Estimated warranty payable

a. P252,000 b. P345,000 c. P630,000 d. P882,000

18. Unamortized bond discount

a. P110,000 b. P200,000 c. P100,000 d. P90,000

19. Bond interest payable

a. P0 b. P300,000 c. P150,000 d. P250,000

20. Total current liabilities

a. P6,445,000 b. P5,105,000 c. P5,445,000 d. P3,945,000

21. Total noncurrent liabilities

a. P7,700,000 b. P7,590,000 c. P7,500,000 d. P7,610,000

PROBLEM 6
NDEA Company purchased 250,000 shares of Simultaneous Corp. common stock on July 1,
2006, at P16.50 per share, which reflected book value as of that date. At the time of the
purchase, Simultaneous had 1,000,000 common shares outstanding. NDEA had no
ownership interest in Simultaneous prior to this purchase. Simultaneous reported net
income of P840,000 for the six months ended June 30, 2006. NDEA received a dividend of
P105,000 from Simultaneous on August 1, 2006, Simultaneous reported net income of
P1,800,000 for the year ended December 31, 2006, and again paid NDEA Company
dividends of P105,000.

On January 1, 2007, NDEA sold 100,000 shares of Simultaneous Corp. common stock for
P17 per share and reclassified the remaining stock as noncurrent. Simultaneous reported
net income of P1,860,000 for the year ended December 31, 2007, paid NDEA Company
dividends of P60,000.

Questions:

22. What is the investment balance on December 31, 2006?

a. P4,125,000 b. P4,140,000 c. P4,155,000 d. P4,260,000

23. What is the gain on sale of 100,000 shares on January 1, 2007?

a. P50,000 b. P44,000 c. P38,000 d. P0.

24. The cumulative effect of the change from equity to cost method of accounting for the
investment in common stock to be reported in the statement of changes in equity should
be
a. P30,000 credit b. P240,000 debit c. P30,000 debit d. P0

25. The share in net income of Simultaneous to be recognized by NDEA in its income
statement for 2007 should be
a. P219,000 b. P60,000 c. P279,000 d. P0

26. What is the investment balance on December 31, 2007?

a. P2,493,000 b. P2,763,000 c. P4,125,000 d. P4,155,000

PROBLEM 7
You are engaged in the regular annual examination of the accounts and records of Buddy
Manufacturing Company for the year ended December 31, 2004. To reduce the work load
at year-end, the company, upon your recommendation, took its annual physical inventory
on November 30, 2004. You observed the taking of the inventory and made tests of the
inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-process is on a
perpetual basis. Inventories are valued at cost, first-in, first-out method. There is no
finished goods inventory.

The company’s physical inventory revealed that the book inventory of P4,239,900 was
understated by P210,000. To avoid delay in completing its monthly financial statements,
the company decided not to adjust the book inventory until year end except for obsolete
inventory.

You examination disclosed the following information regarding the November 30 inventory:

1. Pricing tests showed that physical inventory was overstated by P154,000.

2. An understatement of the physical inventory by P10,500 due to errors in footings
and extensions.
3. Direct labor included in the inventory amounted to P700,000. Overhead was
included at the rate of 200% of direct labor. You have ascertained that the amount
of direct labor was correct and that the overhead rate was proper.
4. The physical inventory included obsolete materials with a total cost of P17,500.
During December, the obsolete materials were written off by a change to cost of
sales.

Your audit also disclosed the following information about the December 31 inventory:

1. Total debits to the following accounts during December were:

Cost of sales 4,802,000 *

Direct labor 847,000
Manufacturing expense 1,764,000
Purchases 1,729,000

* Includes direct labor of P966,000 and manufacturing overhead of P1,932,000.

2. Scrap loss on established product lines is normally insignificant. However, a special

order started and completed during December had a scrap loss of P56,000. This
amount was charged to manufacturing expense.

Questions:
27. The adjusted amount of physical inventory at November 30, 2004 is:
a. P 4,078,900 b. P 4,288,900 c. P 4,498,900 d. P 4,596,900

28. The adjusted amount of inventory at December 31, 2004 is:

a. P 3,844,400 b. P 3,826,900 c. P 3,774,400 d. P 3,756,900

29. The raw materials included in the ending inventory at December 31, 2004 is:
a. P 1,961,400 b. P 2,013,900 c. P 2,031,400 d. P 2,188.900

30. The direct labor included in the ending inventory at December 31, 2004 is:
a. P 581,000 b. P 847,000 c. P 700,000 d. P 966,000

31. The total cost of sales for December 31, 2004 is:
a. P 4,854,500 b. P 4,802,000 c. P 4,784,500 d. P 4,714,500

Problem 8
You requested a depreciation schedule for Semitrucks of Lamban Manufacturing Company
showing the additions, retirements, depreciation and other data affecting the income of the
Company in the 4-year period 2003 to 2006, inclusive. The Semitrucks account consists of
the following as of January 1, 2003:

Truck No.1 purchased Jan.1, 2000, cost P180,000

Truck No.2 purchased July.1, 2000, cost 220,000
Truck No.3 purchased Jan.1, 2002, cost 300,000
Truck No.4 purchased July.1, 2002, cost 240,000
P 940,000

The Semitrucks – Accumulated Depreciation account previously adjusted to January 1, 2003,

and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4
trucks from respective date of purchase, based on five-year life, no salvage value). No charges
have been made against the account before January 1, 2003.

Transactions between January 1, 2003 and December 31, 2006, and their record in the
ledger were as follows:

July 1, 2003 Truck No. 3 was traded for larger one (No.5), the agreed purchase
price of which was P340,000. Lamban Mfg. Co. paid the automobile
dealer P150,000 cash on the transaction. The entry was debit to
Semitrucks and a credit to cash, P150,000.

Jan. 1, 2004 Truck No. 1 was sold for P35,000 cash; entry debited Cash and
credited Semitrucks, P35,000.

July 1, 2005 A new truck (No. 6) was acquired for P360,000 cash and was charged
at that amount to Semitrucks account. (Assume truck No. 2 was not
retired.)

July 1, 2005 Truck No.4 was damaged in a wreck to such an extent that it was sold
as junk for P7,000 cash. Lamban Mfg. Co. received P25,000 from the
insurance company. The entry made by the bookkeeper was a debit to
cash, P32,000, and credits to Miscellaneous Income, P7,000 and
Semitrucks P25,000.

Entries for depreciation had been made for the close of each year as follows: 2003,
P203,000; 2004, P211,000; 2005, P244,500; 2006, P278,000.

Questions:

Based on the above and the result of your audit, determine the following: (Disregard tax
implications)

32. The 2006 depreciation expense is

a. P138,000 b. P184,000 c. P104,000 d. P140,000

33. The carrying amount of Semitrucks as of December 31, 2006 is

a. P885,400 b. P284,000 c. P504,000 d. P354,000

34. The 2003 net income is overstated by

a. P9,000 b. P20,000 c. P31,000 d. P0

35. The 2004 net income is understated by

a. P16,000 b. P50,000 c. P51,000 d. P0
36. The 2005 net income is understated by
a. P23,500 b. P94,500 c. P64,500 d. P0

Problem 9
You are examining the financial statements of Oliver Company for the year ended December
31, 2005. You analysis of the 2005 Notes Receivable account follows:

1. As of January 1, 2005, the balances of the following three notes were:

a. Macasarte note is P70,000, which has been received on August 31, 2004, and
payable in annual installments of P10,000 principal plus accrued interest at 6% each
August 31.
b. Jeanina note is P8,000, which has been discounted by a bank to Oliver Company at
6% on November 1, 2004 and will due on November 1, 2005.
c. Noynay note is P40,000 at 6% interest dated December 31, 2004, and due on
September 1, 2005.

2. Other balances as of January 1, 2005 were confirmed:

a. Debit of P1,400 in the Interest Receivable account.

b. Credit of P400 in the Prepaid Interest Expense account.

3. Analysis of the transactions for the year discloses the following:

a. On February 29, received P25,000 6% note due October 29, 2005 from Jefferson
whose trade account was past due. On the same date the said note has been
discounted by a bank at 6%. The cash proceeds amounting to P24,960 was been
credited to the Notes Receivable account.
b. On August 30, P34,200 has been credited to the Notes Receivable account
representing the receipt of the principal and interest due from Macasarte which is in
accordance with agreement including the two-year principal payments in advance.
c. On September 4, Oliver paid protest fee on note dishonored by Noynay. The P5
payment has been debited to the Note Receivable account.
d. On November 1, Oliver received a check dated February 1, 2006, in settlement of
Jeanina note. The check amounting to P8,120 was included in cash on hand on
December 31, 2005, and credited to the Note Receivable account.
e. On November 4, the company paid protest fee and maturity value of Jefferson note
to the bank, because the note discounted on February 29, 2005 was dishonored.
The total cash paid by the company is P26,031 and was debited to the Note
Receivable account.
f. On December 27, the company accepted furniture and fixtures with a fair market
value of P24,000 in full settlement from Jefferson. The amount has been credited to
the Note Receivable account.
g. On December 31, received principal and interest on Noynay note amounting to
P42,437. The said amount has been credited to the Note Receivable account.
h. On December 31, an accrued interest on Macasarte note of P1,200 has been debited
to the Note Receivable account.

Questions:
37. The effect on the Note Receivable account for the discounting of Jefferson note on
February 29
a. Under by P24,960 c. Under by P25,000
b. Over by P25,000 d. Over by P24,960

38. The entry on the receipt of principal and interest due from Macasarte note has a
a. Debit to interest receivable at P2,800.
b. Credit to interest income at P1,400.
c. Credit to notes receivable at P34,200.
d. Debit to notes receivable at P4,200.

39. The account receivable to be recognized from Noynay note which has been dishonored
on September 4
a. P 40,000 b. P 40,005 c. P 41,600 d. P 41,605

40. The account receivable to be recognized from Jeanina note from the receipt of a check
dated February 1, 2006 and which has been recorded as cash on hand on December 31,
2005.
a. P 8,600 b. P 8,480 c. P 8,080 d. P 8,000

41. The adjusting entry on the receipt of a post-dated check from Jeanina note
a. Debit to accounts receivable for P8,080.
 b. Credit to unearned interest income for P400.
c. Credit to notes receivable for P120.
d. Debit to notes receivable for P8,480.

42. The effect on the note receivable account after Jefferson note that has been dishonored
on February 29 was dishonored
a. Over by P26,031 c. Under by P25,000
b. Under by P51,031 d. Over by P51,031

43. Adjusting entry for the full settlement of Jefferson note through furniture and fixtures
with a fair value of P24,000
a. Credit to notes receivable at P24,000.
b. Debit to allowance for doubtful accounts at P2,031.
c. Credit to notes receivable at P26,031.
d. Debit to accounts receivable at P26,031.

44. Adjusting entry on the full settlement of Noynay note

a. Debit to notes receivable at P42,437.
b. Credit to notes receivable at P42,437.
c. Debit to accounts receivable at P41,605.
d. Credit to accounts receivable at P42,437.

45. Adjusted balance of Notes Receivable on December 31, 2005

a. P 55,005 b. P 51,005 c. P 40,000 d. P 10,000

46. Which of the following strategies most likely could improve the response rate of the
confirmation of accounts receivable?
a. Including a list of items or invoices that constitute the account balance.
b. Restricting the selection of accounts to be confirmed to those customers with
relatively large balances.
c. Requesting customers to respond to the confirmation requests directly to the auditor
by fax or e-mail.
d. Notifying the recipient that second requests will be mailed if they fail to
respond in a timely manner.

47. In confirming with an outside agent, such as a financial institution, that the agent is
holding investment securities in the client’s name, an auditor most likely gathers
evidence in support of management’s financial statement assertions of existence or
occurrence and
a. Valuation or allocation c. Completeness
b. Rights and obligations d. Presentation and disclosure

48. An auditor most likely would review an entity’s periodic accounting for the numerical
sequence of shipping documents and invoices to support management’s financial
statement assertion of
a. Existence c. Valuation or allocation
b. Rights and obligations d. Completeness

49. When using confirmation to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely would be
a. Vendors with whom the entity has previously done business.
b. Amounts recorded in the accounts payable subsidiary ledger.
c. Payees of checks drawn in the mont h after the year end.
d. Invoices filed in the entity’s open invoice file.

50. An auditor’s program to examine long-term debt most likely would include steps that
require
a. Comparing the carrying amount of the debt to its year-end market value.
b. Correlating interest expenses recorded for the period with outstanding debt.
c. Verifying the existence of the holders of the debt by direct confirmation.
d. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.

---End Of Examination---