Use the information below for questions 1-5

The Honesty Company is on a calendar year basis. The following data were found during your audit:

a. Goods in transit shipped FOB destination by a supplier, in the amount of P130,000 had been
excluded from the inventory, and further testing revealed that the purchase had been
recorded.
b. Goods costing P65,000 had been received, included in inventory, and recorded as a
purchase. However, upon your inspection the goods were found to be defective and would
be immediately returned.
c. Materials costing P400,000 and billed on December 30 at a selling price of P320,000 had
been segregated in the warehouse for shipment to s customer. The materials had been
excluded from inventory as a signed purchase order had been received from the customer.
Terms, FOB destination.
d. Goods costing P70,000 was out on consignment with RJE Company. Since the monthly
statement from RJE Company listed those materials as on hand, the items had been
excluded from the final inventory and invoiced on December 31 at P85,000.
e. The sale of P150,000 worth of materials and costing P220,000 had been shipped FOB point
of shipment on December 31. However, this inventory was found to be included in the final
inventory. The sale was properly recorded in 2020.
f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at
December 31, and were not included in the inventory. A review of the customer’s purchase
order set in the inventory. A review of the customer’s purchase order set forth terms as FOB
destination. The sale had not been recorded.

g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not
arrived as yet. However, these materials costing P270,000 had been included in the
inventory count, but no entry had been made for their purchase.
h. Merchandise costing P600,000 had been recorded as a purchase and included as inventory.
Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at
December 31.
i. Further inspection of the client’s records revealed the following December 31, 2020
balances: Inventory, P2,400,000; Accounts Receivable, 580,000; Accounts Payable, 560,000;
Net Sales, 4,040,000; Net Purchases, 1,800,000; Net Income, 700,000

Question:

Based on the above and the result of your audit, determine the adjusted balances of the following as of
December 31, 2020:

1. Inventory
A. P1,230,000 C. P2,685,000
B. P3,285,000 D. P2,695,000
 2. Accounts Payable
C. P710,000 C. P635,000
D. P535,000 D. P760,000

3. Net Sales
A. P4,550,000 C. P3,620,000
B. P3,635,000 D. P3,970,00

4. Net Purchases
A. P1,875,000 C. P1,150,000
B. P1,775,000 D. P1,320,000

5. Net Income
A. P505,000 C. P950,000
B. P605,000 D. P500,000

Use the information below for questions 6-10

Integrity Co. is using the average retail inventory method. The following information is available for the
current year.
Cost Retail
Beginning inventory P2,000,000 P1,700,000
Purchases 13,200,000 25,000,000
Freight in 300,000
Purchase returns 500,000 1,000,000
Purchase allowances 300,000
Departmental transfer in 382,200 800,000
Markups 600,000
Markup Cancellation 40,000
Markdowns 900,000
Markdown Cancellation 300,000
Sales 25,000,000
Sales returns 450,000
Sales discounts 300,000

Questions:

1. The cost ratio using the average retail inventory method is

a. 57.00% c. 58.14%
b. 57.56% d. 56.00%
2. The estimated ending inventory at retail is
a. P1,910,000 c. P2,000,000
b. P2,210,000 d. P1,650,000
3. The estimated ending inventory at cost is
a. P1,099,396 c. P1,088,700
 b. P1,110,474 d. P1,069,600
4. The estimated cost of goods sold is
a. P13,982,804 c. P14,012,600
b. P13,971,726 d. P13,993,500
5. If the inventory at retail based on physical count on December 31, 2020 is P1,700,000, the
estimated inventory shortage is
a. P119,700 c. P100,320
b. P110,180 d. P 0

Use the information below for questions 10-14

On January 1, 2020, Matapat Company acquired 10,000 shares of P60 par value ordinary shares of
Frances Company at P89 per share. These shares are to be held as financial assets at fair value through
profit or loss. Broker’s commissions paid amounts to P6,500. At the end of the reporting period, the fair
value of Frances Company’s shares is P167 per share.

1. The initial investment to be valued upon acquision if the shares are to be held as financial assets
at fair value through profit or loss.
a. P896,500 c. P600,000
b. P890,000 d. P606,500

2. How much will be reported as unrealized gain if the shares are to be held as financial assets at
fair value through profit or loss in the income statement?
a. P780,000 c. P1,070,000
b. P773,500 d. P0

3. The initial investment to be valued upon acquision if the shares are to be held as fair value
through other comprehensive income.
a. P896,500 c. P600,000
b. P890,000 d. P606,500

4. How much will be reported as unrealized gain if the shares are to be held as fair value through
other comprehensive income in the income statement?
a. P780,000 c. P1,070,000
b. P773,500 d. P0

Use the information below for questions 15-16

Axie Inc. paid 9,615,083 on July 1, 2020 for 20% of Humble Company's outstanding ordinary shares.
On the date of acquisition, the following data available. The BV of Humble`s net assets were P2,000,000.
The FV of `s depreciable assets exceeded by P50,000,000. These assets had a remaining useful life of 10
years. Juan paid dividends of P650,000. Net income, P780,000.

1. How much is the share of Axie Inc. in the dividends declared by Humble Company?
a. P130,000 c. P100,000
b. P65,000 d. P0
2. How much is the carrying amount of the investment at December 31, 2020
a. P8,641,083 c. P9,063,083
b. P8,563,083 d. P8,641,083

Use the information below for questions 17-20

On January 1, 2020, Perseverance Company purchased P2,000,000 face value bonds at a price of
P2,627,680 which will yield an interest rate of 7%. The nominal interest rate on the bonds is 11%
payable annually every December 31. The company's business model is to collect contractual cash flows
that are solely payments of principal and interest.

On December 31, 2022, Perseverance Company changed the business model in managing the bonds
from collecting contract cash flows that are solely payments of principal and interest to realizing short
term gains. The market value of the bonds on January 1, 2023, is 107.

Questions:

1. How much is the initial measurement of this investment?

A. P2,000,000 B. P2,627,680 C. P2,140,000 D. P0

2. What amount should be reported as interest income for 2021?

a. A. P183,938 B. P181,413 C. P178,712 D. P175,822

3. What is the carrying amount of the bonds on December 31, 2022?

a. P2,000,000 B. P2,591,618 C. P2,553,031 D. P2,511,743

4. On reclassification date, what amount of gain on reclassification of financial asset should be

recognized by Perseverance Company?
a. Gain of P371,742.99
b. Loss of P371,742.99
c. Gain of P327,565
d. Loss of P P327,565

THEORIES

1. Which of the following is not one of the independent auditor's objectives regarding the audit of
inventories?
a. Verifying that the client has used proper inventory pricing.
 b. Verifying that inventory counted is owned by the client.
c. Verifying that all inventory owned by the client is on hand at the time of the count.
d. Ascertaining the physical quantities of inventory on hand.

2. In auditing inventories, a major objective relates to the existence assertion. Of the following
audit procedures relating to inventories, which does not support the existence assertion?
a. The auditor reviews the client's inventory-taking instructions for such matters as proper
arrangement of goods, separation of consigned goods, and limits on movements of goods
during inventory.
b. The auditor observes the client's inventory and performs test counts as appropriate.
c. The auditor confirms inventories not on the premises.
d. The auditor performs a lower of cost or market test for major categories of inventory.

3. What form of analytical review might uncover the existence obsolete merchandise?
a. Decrease in the ratio of gross profit to sales
b. Ratio of inventory to accounts payable
c. Comparison of inventory values to purchase invoice
d. Inventory turnover rates

4. For manufactured inventories, the valuation assertion is best tested by

a. Tracing unit costs appearing on final inventory listings to auditor's copy of audited finished
goods unit costs.
b. Testing for purchases and sales cutoff.
c. Inquiring as to inventory obsolescence.
d. Comparing unit prices with recent vendors' invoices.

5. An auditor selected items for test counts while observing physical inventory. The auditor then
traced the test counts to the client's inventory listing. These procedures most likely obtained
evidence concerning management's assertion of
a. Completeness
b. Valuation
c. Rights and obligations
d. Existence or occurrence

6. Which of the following items should not be included in a physical inventory?

a. Materials in transit from vendors.
b. Goods in a private warehouse.
c. Goods received for repairs under warranty.
d. Consignment to an agent.

7. In confirming with an outside agent, such institutions, 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 assertion of existence and
a. Valuation or allocation
b. Completeness
 c. Rights and obligations
d. Presentation and disclosure

8. The auditor should insist that a representative of the client be present during the physical
examination of securities in order to
a. Lend authority to the auditor's directives
b. Acknowledge the receipt of securities returned.
c. Detect forged securities
d. Coordinate the return of all securities to proper locations.

9. The audit procedure that will give the least assurance of the validity of the general ledger
balance of investment in stocks and bonds at the audit date is
a. Inspection and count of stocks and bonds.
b. Confirmation from the broker.
c. Vouching all charges during the year to the broker's advices and statements.
d. Examination of paid checks issued in payment of securities purchased.

10. In testing the reasonableness of interest income, an auditor could most effectively use analytical
tests involving
a. Documentary support of specific entries in the account.
b. The beginning balance in the investments account for fixed income securities.
c. The average monthly balance in the investments account for fixed income securities.
d. The ending balance in the investments accounts for fixed income securities.

11. An auditor testing long-term investments would ordinarily use analytical review as the primary
audit procedure to ascertain the reasonableness of the
a. Valuation of marketable equity securities.
b. Completeness of recorded investment income.
c. Existence and ownership of investments.
d. Classification of gains and losses on the disposal of securities.

12. An auditor has set an audit objective of determining whether planned rate of return on
investment in international operations has been achieved. Which of the following audit
techniques will best meet this objective?
a. Inquiry
b. Observation
c. Analytical review
d. Inspection of documents

Bonus Question (3 Points)

Explain this phrase in your own words. Minimum of 3 sentences.

“Do not be deceived: God cannot be mocked. A man reaps what he sows.”