Catanduanes State University

COLLEGE OF BUSINESS AND ACCOUNTANCY

Virac, Catanduanes

FINAL EXAMINATION
PrE2
December 16-17, 2021

INSTRUCTION: Support your answers with computations presented in good form. Solution must be submitted with the
following file name: Family Name_First Name_PrE2 3A or 3B (as the case may be)_FinalExam

PROBLEM NO. 1: You were engaged to perform an audit of the accounts of the Oh! Darling Corporation for the year
ended December 31, 2021, and you observed the taking of the physical inventory of the company on December 30, 2021.
Only merchandise shipped by the company to customers up to and including December 30, 2021 have been eliminated from
inventory. The inventory as determined by physical inventory count has been recorded on the books by the company’s
controller. No perpetual inventory records are maintained. All sales are made on an FOB shipping point basis. You are to
assume that all purchase invoices have been correctly recorded. The inventory was recorded through the cost of sales
method.

The following lists of sales invoices are entered in the sales books for the month of December 2021 and January 2022,
respectively.
DECEMBER 2021
Sales invoice Sales invoice
Amount Date Cost Date shipped
a. P150,000 Dec. 21 P100,000 Dec. 31, 2021
b. 100,000 Dec. 31 40,000 Nov. 3, 2021
c. 50,000 Dec. 29 30,000 Dec. 30, 2021
d. 200,000 Dec. 31 120,000 Jan. 3, 2022
e. 500,000 Dec. 30 280,000 Dec. 29, 2021 (shipped to consignee)

JANUARY 2022
f. P300,000 Dec. 31 P200,000 Dec. 30, 2021
g. 200,000 Jan. 02 115,000 Jan. 02, 2022
h. 600,000 Jan. 03 475,000 Dec. 31, 2021

Based on the above and the result of your audit, answer the following:

1. Sales for the year ended December 31, 2021 is misstated by

a. P100,000 over c. P100,000 under
b. P200,000 over d. P200,000 under

2. Profit for the year ended December 31, 2021 is misstated by

a. P 95,000 over c. P 25,000 under
b. P195,000 over d. P380,000 under

3. Inventory as of December 31, 2021 is misstated by

a. P180,000 under c. P295,000 over
b. P175,000 over d. P455,000 over

4. Working capital as of December 31, 2021 is misstated by

a. P 95,000 over c. P 25,000 under
b. P195,000 over d. P380,000 under

5.
6.
7. Prepare adjusting entries
8.

PROBLEM NO. 2. You are engaged in the regular annual examination of the accounts and records of Valenzuela
Manufacturing Co. for the year ended December 31, 2020. To reduce the workload at year end, the company, upon
recommendation, took its annual physical inventory count on November 30, 2020. 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 perpetual basis. Inventories are
valued at cost, FIFO method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of P1,695,960 was understated by P84,000. 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 items.

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Your examination disclosed the following information regarding the November 30 inventory:
a. Pricing tests showed that the physical inventory was overstated by P61,600.
b. An understatement of the physical inventory by P4,200 due to errors in footings and extensions.
c. Direct labor included in the inventory amounted to P280,000. 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.
d. The physical inventory included obsolete materials with a total of P7,000. During December, the obsolete
materials were written off by a charge to cost of sales.

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

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

Cost of sales P1,920,800
Direct labor 338,800
Purchases 691,600

b. The cost of sales of P1,920,800 included direct labor of P386,400.

9. Adjusted amount of inventory at December 31, 2020

a. P1,509,760 b. P1,631,500 c. P1,502,760 d. P1,722,560

10. Cost of materials on hand, and materials included in work in process as of December 31, 2020
a. P819,560 b. P812,560 c. P728,560 d. P942,760

11. The amount of direct labor included in work in process as of December 31, 2020
a. P618,800 b. P232,400 c. P338,800 d. P386,400

12. The amount of factory overhead included in work in process as of December 31, 2020
a. P772,800 b. P1,237,600 c. P464,800 d. P777,600

PROBLEM NO. 3:

On April 21, 2021, a fire damaged the office and warehouse of Muntinlupa Company. The only accounting record saved
was the general ledger, from which the trial balance below was prepared:

Muntinlupa Company
Trial Balance
March 31, 2021
Cash P 180,000
Accounts receuvabke 400,000
Inventory, Dec. 31, 2006 750,000
Land 350,000
Building 1,100,000
Accumulated depreciation P 413,000
Other Assets 56,000
Accounts payable 237,000
Accrued expenses 180,000
Common stock, P100 pare 1,000,000
Retained earnings 520,000
Sales 1,350,000
Purchases 520,000
Operating expenses 344,000 _________
Totals P3,700,000 P3,700,000

The following date and information have been gathered:

a. The company’s year-end is December 31.

b. An examination of the April bank statement and cancelled checks revealed that checks written during the period
April 1 to 21 totaled P130,000: P57,000 paid to accounts payable as of March 31; P34,000 for April merchandise
purchases; and P39,000 paid for other expenses. Deposits during the same period amounted to P129,500, which
consisted of receipts on account from customers with the exception of a P9,500 refund from a vendor for
merchandise returned in April.

c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P106,000 for April merchandise
purchases, including P23,000 for shipments in transit on that date.

d. Customers acknowledged indebtedness of P360,000 at April 21, 2021. It was also estimated that customers owed
another P80,000 that will never be acknowledged or recovered. Of the acknowledged indebtedness, P6,000 will
probably be uncollectible.

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 e. The insurance company agreed that the fire loss claim should be based on the assumption that the overall gross
profit ratio for the past two years was in effect during the current year. The company’s audited financial
statements disclosed the following information:
2020 2019
Net sales P5,300,000 P3,900,000
Net purchases 2,800,000 2,350,000
Beginning inventory 500,000 660,000
Ending inventory 750,000 500,000

f. Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the inventory was a total loss.

13. How much is the sales for the period January 1 to April 21?
a. P1,430,000 b. P1,510,000 c. P1,519,500 d. P1,506,000

14. How much is the adjusted balance of Accounts Payable as of April 21, 2021:
a. P286,000 b. P237,000 c. P106,000 d. P343,000

15. How much is the net purchases for the period January 1 to April 21, 2021?
a. P650,500 b. P660,000 c. P673,500 d. P683,000

16. How much is the cost of sales for the period January 1 to April 21, 2021?
a. P786,600 b. P830,500 c. P835,725 d. P828,300

17. How much is the estimated inventory on April 21, 2021?

a. P570,000 b. P623,500 c. P587,775 d. P579,500

18. How much is the estimated inventory fire loss?

a. P579,500 b. P535,000 c. P477,000 d. P512,000

PROBLEM NO. 4: You were able to obtain the following ledger details of Trading Securities in connection with your
audit of the I Will Corporation for the year ended December 31, 2019:
Date Particulars DR CR
Jan. 10 Purchase of Emong Co. – 6,000 shares P1,440,000
Feb. 20 Purchase of Bobads Co. – 7,200 shares 1,800,000
March 1 Sale of Bobads Co. – 2,400 shares 540,000
May 31 Receipt of Emong share dividend –
Offsetting Credit to retained earnings 132,000
Aug. 15 Sale of Emong – 4,800 shares 1,176,000
Sept. 1 Sale of Emong – 1,200 shares 276,000

The following information was obtained during your examination:

 From independent sources, you determine the following dividend information:

Nature Declared Record Payment Rate
Cash 01/02/19 01/15/19 01/31/19 P20/share
Share 05/02/19 05/15/19 05/31/19 10%
Cash 08/01/19 08/30/19 09/15/19 P30/share

 Closing market quotation as at December 31, 2019:

Bid Asked
Emong shares P210 P220
Bobads shares 240 250

19. In relation to March 1 transaction, the necessary adjusting journal entry includes
a. A debit to loss of P60,000
b. A credit to Trading Securities of P600,000
c. Both a and b
d. Neither a nor b

20. In relation to August 15 transaction, the necessary adjusting journal entry includes
a. A debit to Trading Securities of P216,000
b. A debit to Loss of P15,300
c. A credit to Gain of P216,000
d. A credit to Trading Securities of P15,300

21. In relation to September 1 transaction, the necessary adjusting journal entry includes
a. A debit to Trading Securities of P36,000
b. A credit to Gain of P36,000
c. Both a and b
d. Neither a nor b

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22. How much is the net amount to be recognized in I Will Corporation’s 2019 profit or loss related to these investments?
a. P48,000 b. P198,000 c. P246,000 d. P204,000

23. In performing tests of the carrying amount of trading securities, the auditor would usually:
a. Count the securities.
b. Reconcile dividend received with published dividend records.
c. Obtain audited financial statements of the investee company.
d. Refer to the quoted market prices of the securities.

PROBLEM NO. 5: On January 2, 2019 GREENDAY INC. acquired 15% interest in Blink Co. by paying P1,400,000 for
7,500 common shares. On this date, the net assets of Blink Co. totaled P8,000,000. The fair values of Blink Co.’s
identifiable assets and liabilities approximates their book values. GREENDAY INC. had no ability to exercise significant
influence over the operating and financial policies of Blink Co. GREENDAY INC. received dividends of P3.50 per share
from Blink Co. on August 1, 2019.
Blink reported net income of P1,250,000 for the year ended December 31,2019. The stocks which were selling on
December 31, 2019 at P190 were classified as financial asset at fair value through other comprehensive income.

GREEDAY INC. paid P1,000,000 (prevailing fair value) on July 1,2020 5,000 additional shares of Blink Co.’s ordinary
shares from another stockholder. The fair value of Blink Co.’s identifiable assets approximates their book values. As a
result of this additional acquisition, GREENDAY has the ability to exercise significant influence over the operating and
financial policies of Blink Co. GREENDAY received a dividend of P4.50 per share from Blink Co. on April 5, 2020 and
P5.50 per share on October 1, 2020. Blink Co. reported net income of P1,500,000 for the year ended December 31, 2020,
P800,000 of which were earned for the six months ended December 31, 2020.

24. What amount of investment revenue should be reported on GREENDAY’S income statement for the year ended
December 31, 2019?

25. What is the balance of the investment account as of December 31,2020?

a. 2,763,750 b. 2,741,250 c. 2,811,250 d. 2,936,250

PROBLEM NO. 6: The equity securities of BSA3AB on December 31, 2021 consisted of the following which were all
purchased in 2021:

Security Shares Cost Fair Value

Clarisse Co. ordinary shares 4,500 P220,500 P207,000
Debora Corp. ordinary shares 15,000 540,000 525,000
Mildred, Inc. preference shares 1,200 180,000 184,800
Totals P940,500 P916,800

The above securities were irrevocably designated as at fair value through other comprehensive income. In 2022, the
company had the following transactions relative to the investments:

May 15 – Sold the 4,500 shares of Clarisse for P65 per share.
June 12 – Bought 2,100 ordinary shares of Sharmaine Corp. at P75 plus broker’s fee of P5,200.

On December 31, 2022, BSA3AB’s investment appeared in the books as follows:

Security Shares Cost Fair Value

Debora Corp. ordinary shares 15,000 P540,000 525,000
Sharmaine Corp. ordinary shares 2,100 157,500 151,200
Mildred, Inc. preference shares 1,200 180,000 184,800
Totals P877,500 P850,200

26. The amount of gain or loss on the sale of Clarisse ordinary shares to be reported in the 2022 income statement of
BSA3AB should be _________________

27. The December 31, 2022 statement of financial position should report investments in the equity securities at ______

28. Prepare adjusting entries on December 31, 2022

29.

PROBLEM NO. 7:

On January 2, 2020, KIKO, Inc. acquired a 15% interest in Trillanes, Inc. by paying P8,000,000 for 100,000 ordinary
shares. On this date, the net assets of Trillanes totaled P40,000,000. The fair values of Trillanes’ identifiable assets and
liabilities were equal to their book values. Kiko did not have the ability to exercise significant influence over the operating
and financial policies of Trillanes. On October 1, 2020, Kiko received dividends of P1.40 per share. Trillanes reported net
income of P5,000,000 for the year ended December 31, 2020. The investment was classified by Kiko as at fair value
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through other comprehensive income. At the end of the year, the investment in Trillanes’ shares had a market value of
P9,000,000.

Additional 300,000 ordinary shares of Trillanes were purchased by Kiko on January 1, 2021, which represents a 25%
interest. The fair value of Trillanes’ identifiable assets, net of liabilities, was equal to their book values of P92,000,000. As
a result of this additional acquisition, Kiko has the ability to exercise significant influence over the operating and financial
policies of Trillanes. Kiko received a dividend of P2.70 per share on October 5, 2021. Trillanes’ net income for the year
amounted to P6,000,000 and the investment had a fair value of P45,000,000 on December 31, 2020.

Questions (2 Points each)

30. In the December 31, 2020 statement of financial position, what is the carrying amount of the investment in equity
securities?

31. What is the total amount of investment-related income that should be reported in the 2020 income statement?

32. Determine the gain on remeasurement to equity that should be reported in the 2021 income statement

33. The goodwill arising from the acquisition of additional shares on January 1, 2021 should be _______

34. The investment in associate should be reported in the statement of financial position on December 31, 2022 at ____

PROBLEM NO. 8: The Maligalig Corporation had the following items recorded in its “Property and Equipment” account
as at December 31, 2021:
Items debited to the account:
Cash paid to purchase a land with a dilapidated building at the beginning of the year P 660,000
Mortgage assumed on the land purchased 240,000
Commission paid to real estate agent 150,000
Attorney’s fees in connection with the acquisition 75,000
Cost of razing old structure 120,000
Grading. Leveling and landscaping costs (permanent improvement) 50,000
Special assessment for public improvement 25,000
Interest on loan for construction of a new building (based on average costs incurred) 81,000
Building construction labor costs 800,000
Building construction materials 672,000
Cost of temporary fencing the property during the construction 28,000
Cost of permanent fencing 86,000
Architect’s fees 112,500
Cost of paving driveway and parking lot 70,000
Fixed overhead charged to the building 300,000
Cost of temporary quarters for construction crew 150,000
Cost of temporary building to house tools and materials 90,000
Excavation Expenses, including a P90,000 cost of excavation equipment 135,000
Insurance on building during construction 31,500
Profit on construction, as the difference between the appraised value of the asset after
construction 360,000
Payments made to construction workers injured during the construction not covered
by insurance 90,000
Modification of building ordered by building inspectors 225,000
Property taxes on land covering the period 2018-2021 240,000
Interest that would have been earned had the money used during the period of
construction been invested in the money market 150,000
Invoice cost of machinery acquired 381,000
Freight, unloading, and delivery charges 22,500
Allowances, hotel accommodations etc. paid to foreign technicians during installation
and test run of machines 20,000
Royalty payment of machines purchased (based on units produced and sold) 75,000

Items credited to the account:

Salvage proceeds from demolished old building 15,000
Proceeds from sale of the excavation equipment 30,000
Proceeds from sale of produce of the machinery test runs 3,500

In addition, you discovered that compensation for the worker’s injury was necessary because it was not covered by the
particular insurance policy purchased by the company. Accident insurance that would have covered the injury would have
cost an additional P20,000. The modifications ordered by the building inspectors resulted from poor planning by the
company.

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What are the correct costs of the following individual property, plant and equipment accounts (2 points each for items 35-
36, 3 points for item 40)?
A B C D
35. Land 1,380,000 1,500,000 1,455,000 1,475,000
36. Building 2,535,000 2,471,500 2,475,000 2,370,000
37. Land improvements 268,500 232,500 156,000 120,000
38. Machinery and equipment 381,000 397,500 420,000 423,500
39. Total depreciable PPE 3,184,500 3,051,000 2,976,000 not given
40. Amount that should be expensed
as incurred during the current year 75,000 150,000 450,000 not given

PROBLEM NO. 9: SHELL Co. started operations on September 1, 2015. SHELL’s accounts at December 31, 2018
included the following balances:

Machinery (at cost) P 910,000

Accumulated depreciation-machinery 482,000
Vehicles (at cost; purchased November 21, 2017) 468,000
Accumulated depreciation – vehicles 196.560
Land (at cost; purchased October 25, 2015) 810,000
Building (at cost; purchased October 25, 2015) 1, 857,200
Accumulated depreciation – building 286,140

Details of machines owned at December 31, 2018, are as follows:

Machine Purchase Date Cost Useful Life Residual Value
1 October 7, 2015 P430, 000 5 years P25, 000
2 February 4, 2016 P480, 000 6 years P30, 000

Additional information:
 SHELL calculates depreciation to the nearest month and balances the records at month-end. Recorded amounts are
rounded to the nearest peso, and the reporting date is December 31.
 SHELL uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the
diminishing balance at 40% per annum.
 The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which bcost P234,
000.
 On acquiring the land and building, SHELL estimated the building’s useful life and residual value at 20 years and
P50, 000, respectively.

The following transactions occurred from January 1, 2019.

2019
Jan. 03 Bought a new machine (machine 3) for a cash price of P 570,000. Freight charges of P4, 420 and
installation costs of P 17, 580 were paid in cash. The useful file and residual value were estimated at five
years and P40, 000, respectively.
June 22 Bought a second – hand vehicle for P 152, 000 cash. Repainting costs of P6, 550 and four new tires
costing P3, 450 were paid for in cash.
Aug. 28 Exchanged machine 1 for office furniture that had a fair value of P125, 000 at the date of exchange. The
fair value of machine 1 at the date of exchange was P115, 000. The office furniture originally cost
P360,000 and to the date of exchange, had been depreciated by P241, 000 in the previous owner’s books.
SHELL estimated the office furniture’s useful life and residual value at eight years and P5, 400
respectively.
Dec. 31 Recorded depreciation

2020
April 30 Paid for repairs and maintenance on the machinery at a cash cost P9, 280.
May 25 Sold one of the vehicles bought on November 21, 2017, for P66, 000 cash.
June 26 Installed a fence around the property at a cash cost of P55, 000. The fence has an estimated useful life of
10 years and zero residual value. (Debit the cost to a land improvements asset account.)
Dec. 31 Recorded depreciation

2021
Jan. 05 Overhauled machine 2 at a cash cost of P120, 000, after which SHELL estimated its remaining useful life
at one additional and revised its residual value to P50, 000.
June 20 Traded in the remaining vehicle bought on November 21, 2017, for a new vehicle. A trade-in allowance
of P37, 000 was received and P233, 000 was paid in cash.
Oct. 04 Scrapped the vehicle bought on June 22, 2019, as it had been so badly damaged in a traffic accident that it
was not worthwhile repairing it.
Dec. 31 Recorded depreciation

Determine the following (2 points each):

41. Depreciation expense for the vehicles for 2019

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42. Depreciation expense for the machinery for 2019

43. Balance of Accumulated depreciation – office furniture account at Dec 31, 2020

44. Depreciation expense for the machinery for 2021

45. Total depreciation expense for 2021

Have a Merry Christmas

and a Blessed New Year!
But always remember:

Christ is the reason

for the season…😊

Prepared by:

MA. THERESA E. SARMIENTO

Asso. Prof. V